Scottish Court of Session Decisions

LORD PRESIDENT (Cooper).—This is an appeal by the subject from the Special Commissioners against assessments to income tax under Case I of Schedule D; and the question of law on which we have so far heard argument is "whether there was evidence on which we were entitled to find that the sales effected by the company were made in the course of a trade carried on by it." The rival contention presented by the appellants was that the company had merely realised fixed capital assets and was therefore immune from taxation on the "profits."

The question is probably best described as a mixed question of fact and law. This at least is clear, that we could not disturb the finding of the Commissioners unless we were able to affirm either that there was no evidence sufficient in law to support their conclusion, or that they had misdirected themselves in law and either addressed their minds to the wrong question or addressed their minds to the right question in the wrong way. In order to discover precisely what they have done, I turn to paragraph IV of the case, and, while I cannot be certain what the Special Commissioners really meant when they wrote this reasoned judgment, I can discover from this paragraph what they actually said, and it is my duty to express my opinion as to the meaning I derive from that statement. The Commissioners, begin their judgment by indicating a large measure of agreement with the company's contentions and instancing certain facts which obviously tend in favour of the company's success. They proceed, however, to depart from this view, and they do so by examining what happened in the years before 1918 when this company was formed. Now, I have no doubt that they were perfectly entitled to examine the years, before 1918 for the purpose of discovering the genesis and antecedents of this company and so placing the picture which they wished to draw in the proper perspective; but it seems to me that they have done more than this. They found that the company's authors prior to 1918 were a firm of speculative builders (whose operations had been dormant since 1909) and that these speculative builders had been carrying on a trade or business of building tenement properties for sale and selling them at a profit in the fashion that was possible in the years before 1909. Next, the Commissioners argued, as I understand them, that, if the now extinguished firm of speculative builders, instead of handing over their forty-six tenements to this company in 1918, as they did, had remained in being and had themselves proceeded to nurse and realise their stock of tenements, they would have been carrying on then original trade and would have incurred liability to tax on the belated profits which they realised. I agree. Then follows the critical statement:

"On all the facts and evidence before us it appeared that the formation of the company to take over the properties from the partnership and to hold and sell them as aforesaid made no difference to the character of the operations."

(The italics are mine.) I am afraid that the Special Commissioners have hardly done justice to themselves in this statement, which is capable of being read, and I am disposed to read it, as involving this obvious fallacy, that, if the profits and gains of a given business operation are taxable when performed under given conditions by AB, they must also be taxable if performed under other conditions by CD. If it be the case, as their considered judgment rather indicates to my mind, that the only thing which tilted the balance in the minds of the Commissioners against the appellants was the circumstance that, if matters had been differently conducted, tax liability would have been incurred by someone else, we of course are bound to dissociate ourselves from that view, and I have no doubt that, when it is so put, the Special Commissioners will equally dissociate themselves from it.

We cannot be sure whether the findings which the Commissioners made represent all the facts which could be found, or only a selection of the facts, so stated as to explain the line of approach adopted by the Commissioners, which line of approach, if I correctly interpret their views, I reject. In these circumstances, I do not consider we can do justice in this case without remitting back, and the remit which I propose is a remit under reference to this opinion and the opinions of your Lordships requesting the Special Commissioners to address themselves afresh to the question whether the operations performed by the company and the sales effected by them were effected in the course of a trade carried on by the company with the result that the profits and gains arising from the sales are taxable income of the company; and to examine this question anew, disembarrassed from the error in law into which on my reading of the opinion they fell when that question was previously before them; I propose further that the Commissioners should be empowered to include in the case in their report any additional findings in fact which they may consider necessary or appropriate, based on the evidence which they have already heard.

LORD CARMONT .—I agree with your Lordship.

LORD RUSSELL .—I also agree.

The Court accordingly remitted the case back to the Special Commissioners, who stated a supplemental case in response to the remit.

The supplemental case set forth, inter alia:—

"(3) We have no additional findings in fact to make except the following. Of the two partners in the firm of Duncanson & Henderson, John Duncanson had died before the formation of the appellant company … The other partner, John Henderson, was one of three first directors of the company. John Maxwell … was one of the other two first directors … (5) We think it might be of assistance to the Court if we gave some explanation of our decision, and particularly of the statement in it which the Lord President quotes. Having formed the opinion that, if the operations in question had been carried out by the partnership in the conditions ruling after 1918, they would clearly have been in pursuance of the partnership's original trade, we proceeded to ask ourselves whether those operations, as in fact carried out by the company formed in 1918, were of the same—i.e., a trading—character. We came to the conclusion that they were. This conclusion was based on all the facts and evidence, and we regarded the large number of sales over periods of years—referred to in the sentence in our decision immediately following the quoted statement—as having particular importance. It appeared, and it still appears, to us that the fact that the company had bought the stock-in-trade of speculative builders, whose families became and remained its majority proprietors, was in the circumstances a relevant matter to be taken into account. We recognise that words used in our decision, and especially the words ‘made no difference,’ might be taken as indicating that we went further than this, and that we attached little or no importance to the change of ownership. This, however, is not the case: we had in mind throughout the change of ownership. The circumstance that, if matters had been differently conducted, tax liability would have been incurred by someone else, viz., the partnership, was not a thing which tilted the balance in our minds against the appellants."

The case was further heard before the First Division on 15th July 1953.

At advising on 22nd July 1953,—

LORD PRESIDENT (Cooper).—I have found this a narrow and difficult case. The question is the familiar one whether given transactions amount to the carrying on of a trade, the profits and gains of which are taxable, or only involve the realisation of capital assets, the profit on which is not taxable. Often as that question has arisen, it is not easy to derive from the numerous decisions any rules except that the dividing line is incapable of precise definition, that the question tends to be a matter of degree, and that the decision in each case turns very largely upon the impression created by the special facts and circumstances—in other words, that it is very difficult to displace the determination of the Commissioners.

Were it not for one matter I should have been content simply to repeat the finding, often made in cases of this kind, that there was evidence to support the Commissioners' determination and that it had not been shown that they had misdirected themselves in law. The difficulty is created by the fact that, notwithstanding our reasoned remit to the Commissioners to clarify their ground of decision, they still maintain that "the fact that the company had bought the stock-in-trade of speculative builders, whose families became and remained its majority proprietors, was in the circumstances a relevant matter to be taken into account." I am unable to follow this argument, and the Solicitor-General admitted that it presented an obstacle. The answer to the question whether a limited company has been engaged in trade depends upon what that company professed to do and actually did. It does not depend upon the occupations carried on a generation ago by relatives of the persons who now hold the shares. The historical approach to this case by reference to the genesis of the company is legitimate for the limited purpose indicated in my previous opinion. It is not legitimate for the purpose indicated in paragraph IV of the case in the passage quoted in my previous opinion. The Commissioners now tell us that they "had in mind the change of ownership" from the old partnership to the company, and that "the balance was not tilted against the appellants" by the consideration that, if matters had been differently conducted, tax liability would have been incurred by the partnership. If this is so, what was the precise relevance of the fact that the company bought from speculative builders whose families became and remained its majority proprietors? The only relevance I can see is the relevance of contrast between the old regime and the new. Under the old regime the trade consisted of the erection of tenements and the sale of these tenements at a profit. Under the new regime the position has been transformed as a result of changed conditions which have notoriously resulted in making tenement dwelling-house property in Glasgow all but extra commercium and in extinguishing the business of the speculative builder of such property. The company took over forty-six tenements, each burdened with a bond, the bonds aggregating over £100,000, and the forty-six bonds were until 1937 real burdens on each of forty-six tenements. The only way in which this large capital debt could be paid off was, we are told, by realising assets; but the company never were able to sell whole tenements and, so far as appears, never even tried to do so, but contrived, as opportunity offered, to dispose of single flats in some of the tenements, each sale reducing the security for the bond over the whole tenement and exposing the debtor to the necessity of making a fresh bargain with the creditor in the bond. It is found that no profits from such sales were ever distributed, and that no entry is found in the profit and loss accounts as respects the sales of the flats. It appears to me that this was correct accounting, the sales being truly transactions on capital account and the proceeds not being profits available for dividend. After 1937 the outstanding bonds were combined in a single omnibus bond for £70,000 of which £23,500 was still outstanding at the close of the relevant accounting periods. Until at any rate the whole of the heritable debt was paid off, the proceeds of the successive sales of flats properly fell to be treated as receipts on capital account and not as profits. To put the matter in another way, the tenements were stock-in-trade in the hands of the partnership but they were capital assets in the hands of the company, to be held as investments or fractionally realised, as circumstances might dictate. In point of fact the company has been holding these assets, so far as not realised by sales of flats, as revenue-earning investments for upwards of thirty-five years.

It is right to add that there is here no suggestion of deliberate tax evasion, the Special Commissioners having in terms accepted the bona fides of the views on the situation expressed by the leading witness and given effect to in the accounts. I am not therefore affected by the suggestion that a decision in favour of the appellants would open a door to tax evasion, for the circumstances of the present case impress me as highly special.

In a case of this kind the subject's right of appeal is useless unless the appellate tribunal can discover from the case whether or not the Commissioners have proceeded upon the correct legal basis in dealing with the facts. I regret to say that I am still in doubt as to whether the Commissioners have erred in law. In particular I do not know to what effect they still attach relevance to what I call for short the "old regime," and this doubt is not removed by their statements that they "had in mind the change of ownership," and that "the balance was not tilted against the appellants by the circumstance that, if matters had been differently conducted, tax liability would have been incurred by someone else."

I do not feel that we can properly do justice in this case without again remitting to the Special Commissioners under reference to our opinions to clarify their determination by stating specifically to what effect and for what purpose they attached relevance in reaching their decision to the fact that the company in 1918 had bought the stock-in-trade of speculative builders whose families became and remained its majority shareholders, and to add such further explanations as to their grounds of judgment as they think fit.

The Court accordingly again remitted the case back to the Special Commissioners, who stated a second supplemental case.

The second supplemental case was in the following terms:—

"(2) Under its memorandum of association the company was free either to hold the properties as trading stock with a view to sale in the course of trade or, on the contrary, to hold them as investments in such manner that any incidental sales would be the realisation of capital assets. On our view of the evidence the company took the opportunity to sell, whenever it could do so at a reasonable price. Opportunities occurred from 1918/1919 to 1922/1923, and, after a long interval when sales were only small and intermittent, became more frequent from 1944/1945 to 1948/1949, when considerable sales took place. During periods when sales were occurring, the company's factor always had a waiting list of enquirers. In our judgment the company's operations, viewed in themselves, bore a marked appearance of trade, and strongly indicated a trading purpose. While we sought in coming to our decision to give fair weight to considerations in favour of the company (on whom the onus of displacing the assessments lay), there was nothing in the evidence to satisfy us that the company intended to hold, or did hold, the properties as investments to the exclusion of trading in them. (3) There were difficulties in the way of sale after the formation of the company in 1918, though sales totalling as much as £10,653 took place in 1918/1919. There had been insuperable difficulties during the later years of the partnership, from 1909 to 1918. The partnership, which had ceased to build, merely held its properties with a view to sale when it should become possible on reasonable terms. The partnership continued to hold the properties as trading stock, and its purpose remained a trading purpose. (4) Although the company was, of course, an entirely distinct legal entity from that of the partnership, and had the freedom noticed in paragraph 2 above, it does not follow that its intentions and purposes can be ascertained without reference to those of the individuals controlling it. There subsisted (as we remarked in paragraph 5 of our report on the first remit) a continuity in the families or group of individuals interested. Moreover (see paragraph 3 of that report) the surviving partner and an individual interested in the partnership properties became two out of the first three directors of the company. These facts are in themselves very far from decisive. But, when we considered them in relation to what the company actually did, they impressed us as pointing to a likely continuity of purpose in the group of individuals interested and so, in the natural course, to a correspondence between the purpose informing the company and the purpose which had informed the partnership. In our judgment this was a relevant factor which reinforced the independent indications (see paragraph 2 above) that the purpose of the company was a trading purpose. In cases of this nature it appears to us that a correct decision can sometimes not be reached solely by a consideration of what was done: the acts need also to be explained and interpreted by reference to the purposes of the actors, and these, in the case of a partnership or a company, include the purposes of individuals who have an effective measure of control."

The case was further heard before the First Division on 15th January 1954.

At advising on 3rd February 1954,—

LORD PRESIDENT (Cooper).—I refer to the opinions delivered when this case was previously before us.

When the choice lies between concluding that a given series of transactions (a) amounted only to the realisation of capital assets, or (b) involved "acts of realisation done in what is truly the carrying out or carrying on of a trade," the question must be a mixed question of fact and of law. As scores of reported decisions demonstrate, the conclusion to be drawn from the facts is often balanced upon a knife, edge, and, when such cases come before an appellate tribunal, the validity of the Commissioners' conclusions have always been examined from the standpoint of (i) inquiring whether there was evidence to support them, and (ii) of testing the correctness of the reasons, if any, given by the Commissioners for the conclusion which they reached. The main difficulty in the present case is created by the reasons given by the Commissioners for their determination: for it was hardly disputed before us that their initial reasoning indicated that they had relied upon an improper consideration. Despite two remits for further expiscation, I regret to say that this matter is still left in some doubt—so much so that the Solicitor-General was constrained to admit that he was fighting a rearguard action. The appellants maintained that the determination of the Commissioners fell to be set aside upon the short ground that after two remits the decision had not been explained by them on any clearly stateable and valid grounds—the analogy being the verdict of a jury given after the admission of incompetent evidence or under a misdirection in law. After full consideration I find it impossible to accept this extreme view. It is very unfortunate that the Commissioners have made a difficult task one of special difficulty; but they have found the facts, and it is still open to us to examine these facts and to decide whether or not they are sufficient in law to support a determination of assessability after elimination of the factor which we have already indicated to be irrelevant to the true issue.

The findings disclose that prior to 1909 the now defunct firm of Duncanson & Henderson were engaged in the trade or business of speculative builders, constructing in Glasgow tenements of flatted houses for sale. They had been doing so since the early 1890's, and it is common knowledge that in those days the enterprise was a familiar one, for "stone and lime" was then regarded as a favoured investment. The legislation of 1909 paralysed this form of enterprise, which received its death blow from the outbreak of war in 1914 and the subsequent introduction of rent restriction. As is evident from many successive statutes and the bill now before Parliament, most tenements in Glasgow and certain other centres have long ceased to be marketable as tenements and the unfortunate owners of such properties have in many instances found their assets transformed into ruinous liabilities. The letting market for individual houses in the tenements survived and survives (subject to rent restriction), and sales of individual houses could sometimes be effected with vacant possession or to sitting tenants: but it is hardly too much to say that, during the first war, tenements as such became extra commercium, as they still are forty years later and are likely to remain for an indefinite time to come. As the firm held forty-six such tenements, constructed at a cost of over £150,000 and burdened with bonds of about £100,000, it is not surprising that the Commissioners found that after struggling through the war they were in "very difficult financial circumstances" in 1918, by which time "there was no hope of selling on reasonable or remunerative terms." In a business sense I suspect that the firm was then hopelessly insolvent. The death of Mr Duncanson brought the firm to an end, and a division of the properties in specie between the families of the partners and a solicitor who had given financial assistance was, we are told, almost impossible owing to the class of properties involved and the liabilities under the various bonds. The company was therefore formed "to hold and realise" the properties in the interests of all concerned. I pause to observe that the parties chiefly concerned must then have been the creditors in the £100,000 worth of bonds, for their security must have been extremely parlous. But for the second world war and the change in money values I question whether these bonds would ever have been paid off.

I attach no special significance to the fact that in their memorandum of association the company included in their objects more than was strictly necessary for the purpose which it is found that they had in view. That is only too common a feature of most memoranda; for as Lord Sands observed in Inland Revenue v. Scottish Automobile and General Insurance Co. (at p. 94):

"A company formed to construct a bridge over the Water of Leith at Balerno will probably take powers wide enough to cover the bridging of the Bosphorus."

One thing is clear, that the company's enterprise was in a practical business sense essentially different in character from the enterprise of the firm from which they took over the properties. Ignoring certain trifling transactions referred to in finding (12), which were practically forced upon them, the company never built nor acquired any property, and never developed the properties which they took over. No alterations were ever made with a view to sale, and the properties were never advertised for sale. The company simply "nursed" and realised as opportunity offered portions of the properties which they held, drawing the rents of the houses which were let, and of course paying income tax under Schedule A on these bouses. As is to be expected from the circumstances of the property market in Scotland, the sales of separate houses in the tenements (and a few shops) could only be made from time to time, either to a few sitting tenants who desired to buy, or on the occurrence of vacant possession; and the details of the sales contained in the case and of the prices realised for the period 1918 to 1946 faithfully reflect the changes in the housing situation in Scotland and the acute shortage of accommodation which made itself felt after the second world war. No sales of complete tenements were ever made. The proceeds of sales have all been applied towards repayment of the heritable debts. Nothing from this source has ever been distributed or treated in the accounts as profit available for dividend. In 1937 the outstanding bonds were replaced by an omnibus bond for £70,000 over all the then existing properties, and this must mean that every subsequent sale must have involved an agreed adjustment with the creditor under this bond, for he would be entitled to look to each as well as to all the properties as his security.

The Commissioners tell us that they accepted as a bona fideexpression of his view the evidence of the principal witness for the appellants, who apparently is in substantial control, that he regarded the company as holding for investment and realisation. This is not only in accord with everything that the company have in fact doneduring the last thirty-five years in their efforts to save what must have seemed a pretty hopeless situation, but negatives any idea of deliberate tax evasion or even tax avoidance. It remains to add that the properties were brought into the company's books at a figure of £127,000 less the amount of the bonds, but we are not told how this figure was arrived at. The shares are held mainly by the Duncanson and Henderson families. These, I think, are all the facts upon which the Commissioners could, or we can, proceed.

Reverting to the determination of the Commissioners, I find that their argument initially was that, if between 1918 and 1947 the original firm had effected the sales in the course of the trade once carried on by them, they would still have been carrying on their original trade which had been dormant between 1909 and 1918, and that the change from the defunct partnership to the company "made no difference to the character of the operations." The underlying idea seems to be that of "continuance of a business" or "succession to a business"; but this was not argued by the Inland Revenue and the inference is incapable of being supported on the facts. In their first report the Commissioners explain that they took the view that the operations of the company were of "the same—i.e., a trading—character" as the operations of the defunct firm. That conclusion seems to me to be unsupported by, if not contradictory of, the facts as found. They add that they attached particular importance to the large number of sales effected by the company over a period of years; but on the facts such gradual realisation was the best and only practicable method of effecting realisation—Inland Revenue v. Old Bushmills Distillery Co. Finally they persisted in the view that it was a relevant matter to take into account that the majority shareholders were members of the families of the former partners. I am unable to see the relevance of that fact as bearing upon the true character of the company's operations; for the corollary would appear to be that the same operations if conducted under exactly the same conditions by the same company with different shareholders might have worn a different character. In the second report the Commissioners expand this view by founding upon the "continuity" of the families and the initial directorship as "pointing to a likely continuity of purpose in the group of individuals interested and so, in the natural course, to a correspondence between the purpose informing the company and the purpose which had informed the partnership"; and this factor they say "reinforced the independent indications that the purpose of the company was a trading purpose." I regret that I cannot accept this line of thought. The purpose which informed the partnership was to carry on for profit a speculative builder's business in tenements. The purpose which informed the company was to salve something from the wreck of a type of trading enterprise which when the company was formed was not "dormant" but dead, by selling the separate flats in the only possible fashion for the benefit of the firm's creditors and of the beneficiaries on the estates of the deceased partners.

On this subject it is of little use to cite decisions, for all of them turned on their own facts and represent different applications of the very wide general principles enunciated in the oft-quoted Californian Copper Syndicate.Property-owning is not a trade. Mere realisation of capital assets is not a trade. Simply for the purposes of analogy I refer to Old Bushmills Distillery; Cohan's Executors; Marshall's Executors;Rand; and Balgownie Land Trust, as affording examples of not dissimilar cases where realisation was held not to involve trading and which indicate that more than the present appellants did or could do would be necessary before they could be held to have "launched forth into the waters of trade." What, it may be asked, was the "trade" on which the company have been embarked? It was certainly not the "trade" on which the old partnership had been engaged prior to 1909. This leads me to refer to a matter which arises under the Scottish law of the "tenements" and is vividly illustrated by the later portions of the case dealing with the basis of assessment and with the conclusions of the Commissioners on that matter. We have not yet heard argument on the cross-appeal, and I simply refer to that part of the case in illustration of the point that in this field of enterprise the whole is not the sum of its component parts. The unit is the tenement; and, if a tenement consists of eight identical houses and one is sold, it does not follow that what is left is worth seven times the value of the house which has been sold, least of all when, as in this case, the entire tenement is subject to a bond. The process of realisation on which the company was engaged was thus in essence a process of breaking up what had been single units and realising the fragments piecemeal. If the old firm had gone bankrupt and its assets had been placed in 1918 in the hands of a trustee in bankruptcy or a liquidator or judicial factor with instructions not to trade but to convert the assets into money as quickly as possible by the only practicable method of realisation short of throwing the tenements away, I do not think that such a functionary could or would have done anything appreciably different from what the company have done, or that his operations could fairly have been described as more than mere realisation.

In the final resort the Inland Revenue suggested that a decision in favour of the appellants would open the door to tax evasion or tax avoidance by trading companies which might transfer their trading stocks to independent companies for purposes of "realisation," and thus cut their trading operations into two and transform their trading stocks into capital assets. This impresses me as a very far-fetched suggestion which would tax the ingenuity of the trading community to breaking point and which, if it overcame the obstacle of the law courts, would soon be checked by a Finance Act. The facts of the present case are poles apart from any such device, and, as I have observed, the bona fides of the appellants is not impugned.

In the whole circumstances I feel obliged to answer the first question in the negative. The second question, which relates to the quantum of liability, if any, stands reserved.

LORD CARMONT .—In the original stated ease the Special Commissioners, after balancing various proved facts which were before them, came to the conclusion that the sales by a company over periods of years were made by the company in the course of carrying on a trade. The company was the successor of a partnership which held heritable properties, and the shareholders and directors were members of the Duncanson and Henderson families who had been in partnership. The Special Commissioners stated that, in their opinion, the formation of the company to take over the properties from the partnership and to hold and sell them "made no difference to the character of the operations."

As this Court was of opinion that the case was capable of being read as if the Special Commissioners had proceeded on the view that, if the profits and gains of a given business operation are taxable when performed under given conditions by AB, they must also be taxable when performed under other conditions by CD, the case was remitted back for supplemental statement which would show that the Special Commissioners' conclusion could be justified on a basis which excluded the fallacy above stated.

In submitting the supplemental case, the Special Commissioners, while stating that they had addressed themselves afresh to the case and reached the same result, stated that it still appeared to them that "the fact that the company had bought the stock-in-trade of speculative builders whose families became and remained its majority proprietors (sic) was, in the circumstances, a relevant matter to be taken into account."

As the supplemental case did not appear to this Court to be satisfactory in view of the Special Commissioners' insistence on the relevance of what they stated in regard to the antecedents of the company's shareholders, a further remit was made asking for explanations as to their grounds of judgment.

The second supplemental case returned by the Special Commissioners does not seem to me satisfactory. It indicates an unwillingness to depart from the view set out by them in the original stated case notwithstanding the opinion of this Court. I am disappointed to find in the second supplemental case no attempt to address the questions of the appellants' liability afresh after putting aside what the Court plainly indicated were irrelevancies. On the other hand there seem to me to be indications of a change of front by the Special Commissioners when it is suggested that there were before them, throughout, indications that the purpose of the company was a trading purpose independent of the antecedents of the company and that "the likely continuity of purpose" from the groups of individuals to the partnership, and to the company, were matters which merely reinforced those "independent indications." Paragraph 2 of the second supplemental case, to which the Special Commissioners refer in support of this suggestion, is at variance with paragraph IV of the original stated case. If, as is now stated, "the company's operations viewed in themselves bore a marked appearance of trade and strongly indicated a trading purpose," it is difficult to understand how the only facts introduced into the original stated case, paragraph IV, were admittedly facts in favour of the company which could only be countered by considering two matters. The first of these was (according to the Special Commissioners' own statement) what the company was actually formed to do and which did not exclude trading, and the second matter (again to give the Special Commissioners in the fourth paragraph of the original stated case) was "what it did." Now, at this point, the Special Commissioners state "it was necessary to look back into the previous history" and every sentence in the paragraph (until the concluding one stating the result reached) contains a reference not to what the company did but to what the partners did. "The partners had, at first, built and sold …" "Then after a number of years they …" "After the 1914–1918 war … if the partners …"

In these circumstances, I am reluctantly compelled to the conclusion that there were no independent indications that the purpose of the company was a trading purpose, which had satisfied the Special Commissioners, apart from the irrelevant matter which they now say was, at the worst, used as a mere support. As I read the statements in the various papers before us, the Special Commissioners have allowed their minds to be warped by their insisting on the actings of the individuals or the partnership which formerly dealt with properties which are now held by the company. The attitude persisted in by the Special Commissioners is shown by the concluding sentence of the second supplemental case, in which, defending the thesis that the acts of a company need to be explained by reference to the purposes of the actors, they say that these, in the case of "a company, include the purposes of individuals who have an effective measure of control." As the result reached by the Special Commissioners in the case can, after two remits to them, be supported only if this unsound proposition is accepted, I am of opinion that the first question in the stated case should be answered by us in the negative.

LORD RUSSELL .—It seems clear from the findings that by 1918 the partnership owning the unsold tenement properties referred to in this case was in a state of practical insolvency. That firm had been engaged in the business of speculative building of tenement property, had built many and sold some, but about 1909 the selling of tenements as units became practically impossible, there being no buyers for such. The firm continued to hold the unsold tenements, letting the flats to tenants as opportunity offered. With the assistance of advances from the bank and from a Mr Maxwell, the firm kept going till 1918 by applying all rents (apart from a family allowance to the partners' families) to the reduction of the firm's indebtedness. At that time the firm was still largely indebted to the bank, its properties were burdened by bonds totalling over £100,000, and the sale of the burdened tenements owned by the firm had continued to be impracticable. I infer therefore that in 1918 (and for some nine years previously) the firm's situation was one of practical insolvency. If at that stage the firm had signed a trust deed for creditors, and a trustee had taken over the firm's burdened assets with instructions from the creditors to hold, nurse and realise as opportunity offered, it seems to me reasonably clear (a) that any reversionary surplus of assets after creditors' claims had been met would have been returned to the partners as capital, and (b) that no part of the proceeds of sale of properties effected by the trustee would have been subject to tax as profits of trading.

When the company known as the Glasgow Heritable Trust was formed, it was empowered by its memorandum, inter alia, to carry on the business of landowners, to acquire property, and to dispose of property held as the company might determine. In the original case it is found as a fact that it was formed to take over from the partnership its heritable properties and to hold and realise them; that the only way in which the capital debts due by the company and secured on its property could be paid off was by realising assets; and that the proceeds of sales of flats, which only began to become possible, on any appreciable scale, in and after 1944–1945, have been applied in repayment of bonds or loans, no part having been distributed to shareholders. It is also found as a fact that the company has made no purchases of property.

In arriving at their decision that the realisation sales made by the company over the later years of its existence were sales made in the course of carrying on a trade, the Commissioners state that they had regard to certain facts which were in favour of the company's contentions, viz., that there was no development of the taken-over properties with a view to sale, and no fresh purchases with a view to sale. They further state (in the original case) that, although the company was formed to take over the properties acquired and to hold and realise these in the interest of the shareholders, a purpose so expressed did not exclude trading and it was necessary to look back into the previous history of the partnership. So looking back they were of opinion that, if the partnership had continued in business after 1918 and had done what the company did, it would have been carrying on its original trade. They therefore concluded that the taking over by the company of the partnership properties—to hold and sell—made no difference to the character of the operations, i.e., the carrying on of a trade. At the first hearing of the case before this Court on 23rd January 1953 our view, as expressed in the opinion of your Lordship in the chair, was that the reasoning of the Commissioners seemed to be influenced to some extent by what appeared prima facie to be a misdirection in law, viz., that if the profits and gains of a given business operation are taxable when performed under given conditions by AB they must also be taxable if performed under different conditions by CD. In answer to the remit then made to the Commissioners for explanation and for any additional facts bearing on the matter they reported in the first "supplemental" case that their decision was influenced, inter alia, by two considerations, viz., (a) the large number of realisation sales effected by the company and (b) the "relevant" fact (as they described it) that the majority proprietors of the company were the families of the partners who had carried on the speculative building trade up till 1918 and had then sold its stock-in-trade (i.e.,the burdened properties) to the company. On resuming consideration of the case on 22nd July we again remitted it to the Commissioners for clarification of this determination, inviting them to state specifically to what effect they attached "relevance" to the fact above outlined under head (b). We now have their report as set out in the second supplemental case, in which they begin by pointing to the wide objects in which the company was empowered to engage under its memorandum of association, including one or other of two forms of enterprise. One was to hold the properties as trading stock with a view to sale in the course of trade. The other was to hold the properties as investments in such manner that any incidental sales would be the realisation of capital assets. I agree that a reference to paragraphs 1 and 2 of the main case confirms that view. The Commissioners then recapitulate the view which they had formed on the evidence led, which I may briefly summarise as follows:—(1) The company took the opportunity to sell whenever it could do so at a reasonable price. (2) Opportunities occurred during the five years following the end of the first world war; that was followed by a long period when sales were small and insignificant; but from 1944 till 1949 considerable sales were effected. (3) The operations of the company during that last period 1944–1949 bore a marked appearance of trade and strongly indicated a trading purpose. (4) There was nothing in the evidence to indicate that the company had discharged the onus of establishing that it intended to hold and did hold the properties as investments to the exclusion of trading in them. (5) The fact that the individual members of the company who were in a position to exercise effective control over the company's operations were a group of individuals representing the families of the partners of the pre-1918 partnership (whose firm had built the properties with a view to selling them in a course of trading) suggested the probability of a continuity of purpose reflected by what the company actually did in the period 1944–1949. (6) Although the fact last mentioned is very far from decisive, it is relevant and reinforces the independent indications that the purpose of the company was a trading purpose.

In considering the above along with the findings cumulatively set out in the original case and the first supplemental case, I have found difficulty in envisaging and weighing what precisely the facts found are. For example, there is a finding in paragraph 15 of the original case regarding a statement made by a witness called Mr Waddell, and the Commissioners state that "we accepted this (statement) as a bona fide expression of the witness's view." That does not appear to me to be a fact relevant to the issue between the parties; and if the Commissioners' statement means, as in its context it must mean, that the witness believed that his opinion was right, but it was really wrong, it was unnecessary for that paragraph to be included in the case. The question for decision by the Court, as set out in the question of law, is a mixed question of fact and law; and it is for the Commissioners to set out all the relevant facts, proved or admitted, on which their decision has been based.

I should have had little difficulty in agreeing with the Commissioners' decision if the stock-in-trade acquired by the company had been moveable assets, such as surplus war stock or the like. But the stock-in-trade, so-called, was in this case heritable property, which is capable of being held as an investment and has been so held by the company; and its fruits in the shape of the rents were and are being ingathered by the company and are now yielding—under deduction of Schedule A tax assessments and other outgoings—a surplus sufficient to yield a good dividend to the shareholders. The proceeds of realisation of the sold parts of the property have been throughout and are still being applied to meet the debts and burdens on the properties. Even so, I take it as "well established that enhanced values obtained from realisation or conversion of securities may be assessable to income tax where what is done is not merely a realisation or change of investment, but is an act done in what is truly the carrying on or carrying out of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively in order to make gain, dealing in such investments as a business, and thereby seeking to make profits." The words quoted appear in the opinion of the Lord Justice-Clerk in Californian Copper Syndicate (at p. 897) and were cited with approval by Lord President Normand in Fraser (at p. 499). The list of sales effected by the company which have attracted the assessments appealed against is set out in appendix B. It is an impressive list, and on a prima facieview it looks like trading, whatever be the label which the company seek to attach to it. After considerable hesitation, having found the issue a narrow one, I do not find myself able to affirm that there was no evidence to support the view that in dealing with those properties the company has dealt with them as a business in a series of operations which were in the nature of trade. I would have answered the first question of law in the affirmative, but, as your Lordships take a different view, I can only respectfully dissent from the motion proposed to answer the question in the negative.