The Judicial Committee of the Privy Council Decisions

De Maroussem & Ors v The Commissioner of Income Tax (Mauritius) [2004] UKPC 43 (22 July 2004)

Privy Council Appeal No. 54 of 2003

Robert De Maroussem and others (Heirs to the late Paul

De Maroussem) Appellants

v.

The Commissioner of Income Tax Respondent

FROM

THE SUPREME COURT OF MAURITIUS

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 22nd July 2004

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Present at the hearing:-

Lord Scott of Foscote

Lord Hutton

Lord Millett

Lord Brown of Eaton-under-Heywood

Dame Sian Elias

[Delivered by Lord Scott of Foscote]

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1. This is an appeal from the Supreme Court of Mauritius. It is not difficult to infer from the name of the respondent that it is a case about tax. Mauritius imposes no tax upon capital gains as such. The relevant legislation does, however, require that a number of types of pecuniary receipt, some of which might, at least in part, be regarded as having a capital receipt character, be brought into account as "gross income" for income tax purposes. The statutory provision in question is section 11(1) of the Income Tax Act 1974.
2. The specific provision under which, in the opinion of the Supreme Court, the taxpayer was chargeable is paragraph (h) of section 11(1). This paragraph requires to be brought into account as "gross income"

"any sum or benefit, in money or moneys worth, derived from the carrying on or carrying out of any undertaking or scheme entered into or devised for the purpose of making a profit, irrespective of the time at which the undertaking or scheme was entered into or devised…"

The short question on this appeal is whether, and if so how, paragraph (h) applies to a landowner who enters into a scheme with a developer under which the developer expends money so as to bring the development land into a state in which building plots can be sold off to individual purchasers and under which the landowner takes a proportion of the sum for which each plot is sold with the developer taking the balance. The taxpayer contends that the whole of his receipts under such a scheme constitute capital and should not be brought into account under paragraph (h) as "gross income". The Commissioner, on the other hand, seeks to uphold assessments under which the whole of the receipts are treated as taxable income and no deductions representing the capital value of the development land before the implementation of the scheme are made.

3. There is also a second question, namely, whether two of the assessments made against the taxpayer, those relating to the years 1989/90 and 1990/91, were out of time. On both these questions the Tax Appeal Tribunal and the Supreme Court of Mauritius found against the taxpayer. It is convenient at this point to outline the facts in evidence before the Tribunal.

The facts

4. The taxpayer, Paul de Maroussem, died shortly before the hearing of his appeals to the Tax Appeal Tribunal against assessments for six years 1989/90 to 1994/5 (inclusive). The appeals were taken over and continued by his heirs but the title of the proceedings was left unchanged. This procedural irregularity was commented on in the judgment of the Supreme Court but nothing turns on it. It is convenient to continue to refer to the late Paul de Maroussem as the taxpayer although it is his heirs who are the true appellants and taxpayers.
5. In 1947 the taxpayer acquired the residue of a 99 year lease of about 1,000 arpents of land at Wolmar, near Flic en Flac on the west coast of Mauritius (1 arpent of land equals 0.84625 of one acre). The lease was due to expire in 2038. By 1972, at latest, the owner of the land subject to the taxpayer's lease was a company, Medine Sugar Estate Co. Ltd ("Medine"). The taxpayer used the land principally for rearing cattle and deer. He also cut and sold timber from the land and made and sold charcoal. A part of the land had been at one time a sand quarry. Whether the taxpayer had ever exploited the sand quarry is not clear and at least by 1988 it had become a disused sand quarry.
6. The land clearly enjoyed development potential. In 1972 Medine, with the consent of the taxpayer, sold 32 arpents of the land for the construction of an hotel. The price was Rupees 800,000. The taxpayer received a compensatory payment from Medine of Rs.500,000 for surrendering his leasehold interest over the 32 arpents. In 1988 a further 50 arpents of the land were compulsorily acquired by the Government of Mauritius. Compensation for the compulsorily acquired land had to be paid. The amount of the compensation was determined by arbitration, with the taxpayer receiving 50.04 per cent and Medine receiving 49.96 per cent of the compensation. The evidence does not disclose what, if any, tax treatment these receipts by the taxpayer received. But their Lordships think it safe to assume that they received none. If any assessments in respect of them had been raised it is inconceivable that some reference to the assessments would not have been made in the course of the hearings of the taxpayer's appeals against the six 1989 to 1994 assessments.
7. Later in 1988 the prospect of the sale for the purpose of residential development of a further 75 arpents of the land arose. The 75 arpents had a frontage to the beach and included the disused sand quarry. It was proposed that the 75 arpents be sub-divided into 456 building plots and that the building plots be sold off to individual purchasers. Before, however, that could be done the consent of the Ministry of Works to the proposed sub-division of the land (the "morcellement" of the land) was necessary.
8. The implementation of the development proposal involved three parties: first, the developer, Societé Roger de Chazal ("the Societé") whose responsibility it would be to undertake all measuring and surveying of the 75 arpents, the demarcation of the 456 building plots, the in-filling of the disused quarry so as to render the area suitable for the building of houses, the construction of estate roads and drainage and, generally, the management of the project; secondly, Medine, the landowner; and, thirdly, the taxpayer, who would have to permit the Societé to have access to the site in order to carry out the necessary pre-sale development works and would also, on the sale of each building plot, have to release the plot from his lease. The documents in evidence before their Lordships, and in evidence before the Tribunal and the Supreme Court, include written agreements between the Societé and Medine. They include, also, letters passing between the taxpayer and Medine in which they agree the proportion that the taxpayer would receive of the purchase price of each plot. But they contain no document indicative of any direct agreement between the Societé and the taxpayer or constituting any written agreement to which all three were parties. This feature of the evidence has led to the submission made on behalf of the taxpayer that the development of the land as a building site and its sub-division into building plots was not an undertaking or scheme to which the taxpayer was a party. This submission is unrealistic and their Lordships cannot accept it. It is plain that the works necessary to prepare the 75 arpents as a building site and the construction of the necessary estate roads and drains, all of which had to be done before the sale of the individual building plots, required the prior consent of the taxpayer, the lessee of the land. The morcellement was clearly a scheme to which all three, the Societé, Medine and the taxpayer, were parties.
9. The written agreements between the Societé and Medine were dated 23 December 1988. Under these agreements the Societé was constituted agent for Medine to carry out the morcellement and obtain the requisite permission from the Ministry of Works. Under these written agreements the price paid by each purchaser of a building plot was to be applied first in discharging the land transfer tax attracted by the sale and then divided into two equal shares. Out of one of the half shares all the expenses of the development work carried out by the Societé and the other expenses of the morcellement were to be met with the Societé taking the balance. The other half share was to be taken by Medine. It was left to Medine to deal with the taxpayer. In letters passing between the taxpayer and Medine dated 9 December 1988 and 19 December 1988 they agreed that the half share taken by Medine would be divided between them in the same proportions as fixed in the then current arbitration regarding the compensation paid, or payable, by the Government for the compulsorily acquired land. In the event, this was 50.04 per cent to the taxpayer and 49.96 per cent to Medine.
10. By a letter dated 17 November 1988, addressed to Medine c/o the Societé, the Ministry of Works consented to the morcellement application that had been made. The consent was expressed to be subject to a number of conditions. These included that

"1. the acess roads be constructed and tarred to the satisfaction of the Highway Authority;

2. drains, kerbs and pipe culverts be provided to the satisfaction of the Highway Authority;

3. …

4. necessary back filling of the land with proper materials to be done and compacted to the satisfaction of the District Council …

5. electricity and street lighting conductors to be provided to the satisfaction of the Central Electricity Board;

6. ..."

These conditions demonstrate that substantial expense had to be incurred before the sale-off of any building plots could take place, all of which expense was to be met from the Societé's half share of the prices paid for the plots. Medine and the taxpayer had to do nothing but make available the development land i.e. the 75 arpents.

11. The development of the 75 arpents into building plots and the sale-off of the plots took place over a seven year period. When each deed of sale was drawn up the taxpayer surrendered his lease over the plot in question and received 50.04 per cent of 50 per cent of the price paid by the purchaser. Over the period 1988 to 1995 he received payments in each income tax year. The total sum he received amounted to more than Rs.37 million.
12. The taxpayer's income tax return for the year 1989/90, in which taxable receipts received in the year 1 July 1988 to 30 June 1989 should have been included, was undated and unsigned. His return for the year, 1991/92, dated 29 September 1991, contained an entry under paragraph 7.6 ("Interest and Dividends") of Rs.1,402,903. This sum included interest of Rs.1,137,256, which apparently had been earned by morcellement payments that the taxpayer had received and placed on deposit. The source of this interest was not, however, disclosed in the return.
13. The Tax Appeal Tribunal, in its Determination of 20 October 2000, said that in his return for the year 1990/91 the taxpayer had declared a sum of Rs.9,499,815 described in the return as "Compensation for giving up of leasehold right". It appears, however, that the entry in the return to which the Tribunal referred had been added to the return at a later stage by the tax authorities after they had become aware of the taxpayer's morcellement receipts. It is accepted by the Commissioner that there is no evidence that this entry was made by the taxpayer. That being so the true position is that in none of his returns for the years 1989/90 to 1994/95 did the taxpayer include any of his morcellement receipts.
14. The Commissioner wrote to the taxpayer on 23 August 1994 asking to see the taxpayer's books of account for the years 1979 to 1990. There is no finding, however, that connects this letter to any awareness by the Commissioner of the morcellement payments. The Tribunal in its Determination recorded the Commissioner's contention that "it was only in October 1994 that the Income Tax Department received information" about the morcellement payments but made no finding about this. The documents before their Lordships include a letter dated 25 November 1994 from the Societé to the Commissioner which sets out morcellement payments made to the taxpayer over the period 27 May 1991 to 30 September 1994. The payments total Rs.17,894,245. The Societé's letter was expressed to be in response to a request from the Commissioner in a letter to the Societé dated 4 November 1994. It is safe, therefore, to conclude that by November 1994 at latest the Commissioner was aware that the taxpayer had been receiving substantial payments arising from the morcellement of the 75 arpents. There is no finding that justifies placing the Commissioner's awareness of this at any earlier date.
15. The assessment for the tax year 1991/92 was issued by the Commissioner in June 1995. The assessments for the tax years 1989/90, 1990/91, 1992/93, 1993/94 and 1994/95 were not issued until June 1997. No explanation has been given for the two year period between the issue of the 1991/92 assessment and the issue of the other assessments.
16. Each of the assessments includes, as an ingredient of "Total Gross Income", an amount attributed to "Trade, Business, Profession". This amount represents the taxpayer's morcellement receipts for the income year to which the assessment relates. For example, the assessment for the year of assessment 1989/90, based on the taxpayer's income in the year 1988/89, includes the sum of Rs.7,217,142. This represents the total of morcellement payments received by the taxpayer in that year. The comparable sum in the assessment for the year of assessment 1990/91, based on income in the year 1989/90, is Rs.9,499,815. In the assessment for the year of assessment 1991/92 the comparable sum originally included was Rs.5,500,000. But it was subsequently realised that the Rs.5,500,000 involved an element of double counting and the figure was reduced to Rs.4,362,744. Nothing, for present purposes, turns on this.
17. In each of the six assessments the "Total Net Income" figure on which, after the deduction of personal allowances and reliefs, the tax payable was calculated, was exactly the same as the "Total Gross Income" figure, the major ingredient of which was the morcellement receipts for the year in question. It is apparent, therefore that the whole of these receipts was treated as taxable. No deductions, representing the cost to the taxpayer of obtaining these payments, was made. This is a feature of the assessments to which their Lordships must return.
18. The taxpayer appealed against these assessments. He contended that his morcellement receipts represented capital receipts, not profit, and therefore were not taxable. He contended also that some of the assessments were out of time. It is convenient at this juncture to refer to the relevant legislation.

The legislation

19. On the substantive point, namely, whether or to what extent the taxpayer's morcellement receipts are taxable, the relevant statute is the Income Tax Act 1974. Section 4 of the Act says that –

"Subject to this Act, income tax shall, in and for every year –

(a) be assessed and levied by the Commissioner and paid to him by every person on all income, other than exempt income, derived by him during the preceding year; and

(b) be calculated on the person's chargeable income …"

20. Section 2(1) of the Act is a definition section. "Chargeable income", for the purposes of the present case, means –

"… the amount remaining from net income after deductions to which the taxpayer is entitled …"

"net income" means

"… the amount remaining after deducting from the gross income all allowable deductions."

"gross income" means

"(a) the aggregate amount of all income derived from the sources specified in Part III other than exempt income; or

(b) the amount of income derived from a particular source without any deduction from that amount."

21. Part III of the Act includes section 11(1) to which reference has already been made (paras. 1 and 2 above). It has not been suggested that any other provision in Part III has any relevance to this case. Section 11(1) says that "the gross income" of a person includes, among other types of receipt,

"(a) (i) the gross income derived from a business

…

(g) any sum or benefit, in money or money's worth, derived from the sale of any property or interest in property, where the property was acquired in the course of a business the main purpose of which is the acquisition and sale of immovable property;

(h) [see para. 2 above]

…

(j) any other income derived from any other source."

22. In their Lordships' opinion if the taxpayer's morcellement receipts are to be taxable the case must be brought under paragraph (h). Paragraph (a) is not applicable. The taxpayer was not carrying on a business. Paragraph (g) is not applicable. He did not acquire the 75 arpents in the course of a land dealing business. And paragraph (j) cannot apply unless the capital content of the morcellement receipts is deducted so as to leave an element that might be capable of being described as "income". So the case must be brought under paragraph (h). But the content of the other paragraphs of section 11(1), and in particular those cited above, are, their Lordships think, relevant to an understanding of how the legislature intended paragraph (h) to be applied. Thus, paragraph (a)(i) refers to "the gross income derived from a business". But the taxpayer's expenditure in carrying on the business would have to be deducted in order to arrive at the net income of the business. If the business was that of buying and selling immovable property, the case would fall within paragraph (g). But if in the course of this business a property were purchased for Rs.X and later sold for Rs.Y, no one could sensibly suggest that the net income for tax purposes of this item of business would be Rs.Y. The net income would be at worst Rs.Y–Rs.X and, probably, there would be other deductions as well.
23. As to the time bar point, there has been some uncertainty as to whether the relevant statutory provisions are those contained in section 75 of the Income Tax Act 1974 (as amended by section 2(n) of the Finance Act 1993) or those contained in section 130 of the Income Tax Act 1995. Section 163 of the 1995 Act provides for the Act to come into operation

"(a) in relation to an individual, on 1 July 1996 in respect of the income year commencing on 1 July 1996 and in respect of every subsequent income year"

The five assessments issued in June 1997 were for years of assessment that preceded 1 July 1996. Nonetheless counsel both for the taxpayer and for the Commissioner submitted that the applicable statutory provisions were those contained in section 130 of the 1995 Act. Both the Tax Appeal Tribunal and the Supreme Court dealt with the case on the footing that section 130 of the 1995 Act applied. In the circumstances their Lordships are content to proceed on the same footing.

24. Section 129 of the 1995 Act applies where the Commissioner "is not satisfied with the return submitted" by the taxpayer and empowers the Commissioner

"… according to the best of his judgment, [to] make an assessment of the amount of chargeable income of, and income tax payable by [the taxpayer] … and [to] give him written notice of the assessment."

This is the statutory provision pursuant to which the Commissioner made the five assessments in June 1997. But section 130 of the Act provides as follows:

"(1) Subject to subsection (2), the Commissioner shall not, in a year of assessment, make an assessment under section 129 in respect of a period beyond 4 years of assessment preceding that year of assessment.

(2) The Commissioner may, in case of fraud or wilful neglect, at any time make an assessment under section 129."

25. The assessments made by the Commissioner in June 1997 in respect of the years of assessment 1992/93, 1993/94 and 1994/95 were made within the four years prescribed by section 130(1). But the assessments in respect of the years of assessment 1989/90 and 1990/91 were made outside that four year period. Those assessments can only stand, therefore, if the failure of the taxpayer to include his morcellement receipts in his returns for the two years in question was attributable to "fraud or wilful neglect".

The Tax Appeal Tribunal

26. In its Determination of 20 October 2000 the Tribunal found against the taxpayer both on the substantive issue and on the time bar issue. As to the time bar issue, the Tribunal referred to the provisional and incomplete character of the 1988/89 return, incorrectly noted that a receipt of Rs.9,499,815 had been declared by the taxpayer in his 1990/91 return, referred to the information received by the Commissioner in 1994 and continued –

"There was indeed a failure on the part of the Appellant to disclose information regarding compensation he had received at the relevant period of time … It is therefore our considered view that this concealing of information entitled the Respondent to raise assessments for those years under section 130(2) of the Income Tax Act 1995"

27. As to the substantive point, the Tribunal declined to accept that the "leasehold rights of the Appellant was merely a capital asset" and held that "the money Appellant received was in the nature of an 'income' from 'any other source', no more and no less". So the appeals were dismissed.

The Supreme Court

28. A case was stated for the opinion of the Supreme Court. The case was heard by Matadeen J and Narayen J who delivered a joint judgment on 26 March 2003. In paragraph 1 of the judgment they described the Tribunal's decision as reached

"essentially on the ground that the money received constituted profits from a profit–making undertaking or scheme and not the realisation of a capital asset."

On this point, the substantive point, the Court agreed with the Tribunal. The Tribunal had founded its conclusion on the provision in section 10(b) of the 1995 Act equivalent to section 11(1)(j) of the 1974 Act. The Supreme Court, however, founded its conclusion on section 11(1)(h) of the 1974 Act and their Lordships respectfully agree that this was indeed the relevant statutory provision.

29. The Court noted that section 11(1)(h) was similar to section 26(a) of the Income Tax Assessment and Social Services Contribution Act 1936 in force in Australia and considered by this Board in McClelland v Commissioner of Taxation [1971] 1WLR 191. Section 26(a) said that

"The assessable income of a taxpayer shall include –

(a) profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme."

In McClelland the Board had held, at p 198, that the question whether the appellant had engaged in a "profit-making undertaking or scheme" was one of fact. Applying the McClelland approach the Court concluded that on the facts the taxpayer had joined with Medine and the Societé in a profit-making undertaking or scheme. They held that the sums received by the taxpayer "were clearly income and not capital".

30. On the time bar point the Court said this –

"The Tribunal found that there had been wilful neglect on the part of the [taxpayer] in that, first, his tax return for the year of assessment 1989-1990 was only a provisional and incomplete one and, secondly, he failed to provide additional information as requested when the respondent came to know in 1994 of the sources of the various sums he had received in the year of assessment 1990-1991. We hold there was sufficient evidence before the Tribunal to base a finding that there had been wilful neglect …"

So the taxpayer's appeal was dismissed.

31. Their Lordships regret to have to say that they are in disagreement with the Tribunal and the Supreme Court on both points. It is convenient to take the substantive point first.

The substantive point

32. Their Lordships were told that there was no local case law regarding the meaning and effect of section 11(1)(h) of the 1974 Act. But the comparison drawn by the Supreme Court between section 11(1)(h) and the 1936 Australian statute is instructive. The Australian Act requires that "profit arising from the sale" (emphasis added) be brought into account. Section 11(1)(h) may be compared also with section 65(2)(e) of New Zealand's Income Tax Act 1976. Section 65(2)(e) says that the assessable income of any person includes –

"… all profits or gains derived from the carrying on or carrying out of any undertaking or scheme entered into or devised for the purpose of making a profit" (emphasis added).

33. If section 11(1)(h) had been in the form either of section 26(a) of the 1936 Australian statute or section 65(2)(e) of the 1976 New Zealand statute, the Commissioner's treatment of the whole of the morcellement receipts as taxable income would be plainly wrong. It cannot be contended that the taxpayer's morcellement receipts represented "profit" derived from his arrangements with Medine and the Societé. Such a contention ignores economic reality. In order to obtain the morcellement receipts the taxpayer had to surrender his leasehold interest over the 75 arpents. Before he agreed to the arrangements with Medine and the Societé his leasehold interest in the 75 arpents had a market value. The development work carried out by the Societé, as a necessary preliminary to the sale of the building plots, presumably added value to the land. There is no actual evidence or finding to that effect but their Lordships are prepared to infer that that must have been so. The beneficiaries of that added value were the landowners, Medine and the taxpayer. Their respective shares of that added value would represent a "profit" or "gain" that each of them derived from the "undertaking or scheme". The full amount of their respective morcellement receipts consisted of a sum representing the value of their respective interests in the land before its development and a sum representing the added value produced by the development. Only the latter could be described as profit derived from the undertaking or scheme.
34. Section 11(1)(h) does not in terms, unlike the Australian and New Zealand legislation, refer to "profits" or "gains" derived from the undertaking or scheme. It refers to "any sum or benefit … derived from … any undertaking or scheme …" But, in their Lordships' opinion, the words "any sum or benefit" cannot sensibly be given their literal breadth but must be read as referring to any sum or benefit in the nature of a profit or gain. There are several justifications for this construction. First, the construction produces consistency between paragraph(h) and paragraph(g), where the like words, "any sum or benefit" cannot be read as subjecting to tax the whole of the sale price of a property acquired in the course of a land dealing business. Second, the "undertaking or scheme" has to be an undertaking or scheme "entered into … for the purpose of making a profit". Suppose a case where the landowner agreed with the developer to accept such portion of the sale price of each building as represented the market value of the plot prior to the commencement of the development. How could it be contended that the landowner had entered into his agreement with the developer "for the purpose of making a profit"? Their Lordships have no difficulty, on the facts of this case, in agreeing with the Supreme Court that the taxpayer was party to an "undertaking or scheme entered into or devised for the purpose of making a profit". But the only profit the landowners, Medine and the taxpayer, stood to make was their respective share of the value added to the land by the work to be done by the Societé in implementing the morcellement scheme. In their Lordships' opinion, paragraph(h) should be construed so as to equate the "sum or benefit" which is subjected to tax with the profit or gain derived by the taxpayer from the undertaking or scheme in question.
35. It follows that, in their Lordships' opinion, the Commissioner's treatment of the whole of the morcellement receipts as taxable was mistaken. Mr Goodfellow QC, counsel for the Commissioner, submitted that it was for the taxpayer to provide evidence of the value of his leasehold interest in 1988 prior to the implementation of the morcellement scheme. If the taxpayer had done so he would have been in a position to challenge the basis on which the Commissioner had treated the morcellement receipts. Since the taxpayer had not done so, there was nothing, submitted counsel, to show that prior to the implementation of the morcellement scheme the 75 arpents had any value at all. He pointed out that a large part of the 75 arpents consisted of a disused sand quarry the value of which might well have been negligible or even negative.
36. Their Lordships are unable to accept counsel's submissions. First, the evidence in the case shows clearly that pre the morcellement scheme the 75 arpents did have substantial value, derived no doubt from its development potential. The evidence is to be found in the written agreements between the Societé and Medine. These were arms length agreements. The Societé was in business as a land developer. It was not a philanthropist. It agreed with Medine to manage and implement the morcellement scheme. This included the carrying out of all the development work required by the Ministry of Works as a condition of approval being given to the morcellement. The Societé agreed with Medine that 50 per cent of the sale price of the plots would go to the landowners. The Societé engaged itself, therefore, to incur expenditure on the land and to invest its time and resources in order to produce a return to the landowners of 50 per cent of the sale price of the plots. It is difficult to envisage how the value of the land in the absence of that expenditure could have been less than that 50 per cent minus the cost of the expenditure. It might indeed have been more, depending on the respective negotiating strengths of the Societé and Medine.
37. In addition to the arms' length agreements made between the Societé and Medine, the effect of which was to attribute a substantial value to the land being made available for the development, there was the agreement between Medine and the taxpayer as to how that value should be shared between them. They agreed to abide by the 50.04:49.96 split fixed by the arbitral proceedings instituted in relation to the compensation to be paid by the Government for the land compulsorily acquired. It is clear from the correspondence that this agreement, too, was reached by parties negotiating at arms' length.
38. The combination of the written agreements between the Societé and Medine and the agreement by correspondence between Medine and the taxpayer show that the taxpayer's leasehold interest in the 75 arpents had a real market value, including a ransom value, prior to the implementation of the morcellement scheme and, therefore, not derived from the scheme.
39. The defect in each of the six assessments is, in their Lordships' view, a matter of principle. The assessments were made and have been defended on the basis that the totality of the morcellement receipts represent taxable income in the hands of the taxpayer whether or not there is any profit element included in them. This basis is, in a case where it is clear that the 75 arpents did have a substantial market value prior to the implementation of the morcellement scheme, wrong in law. Section 129(1) requires the Commissioner to make an assessment "according to the best of his judgment". Where it is clear that in exercising his judgment he has misdirected himself in law and where, as here, the misdirection has had a material effect on the quantum of the assessments, their Lordships do not think the assessments can stand. Their Lordships have been referred to no authority on the point but it would seem a plain injustice to permit assessments suffering from such defects to be enforceable against the taxpayer.

The time bar point

40. Their Lordships can deal quite shortly with this point. The onus is on the Commissioner to establish "fraud or wilful neglect". In Hillenbrand v Commissioners of Inland Revenue (1966) 42 Tax Cases 617 the Lord President Lord Clyde said that

"To establish wilful default within the meaning of those words in section 47 of the Income Tax Act 1952, the onus is quite clearly upon the Crown, and the taxpayer is not in the position of having to prove himself innocent of such a charge without proof by the Inland Revenue that he is guilty of default"

Similarly, in their Lordships' opinion, the onus is on the Commissioner to establish that the taxpayer was guilty of wilful neglect. Fraud has never been alleged.

41. The meaning to be attributed to the expression "wilful neglect" may vary according to the context but generally the expression should be taken to mean that there has been an intentional or purposive omission to do something that the person in question knows he has a duty to do (see R v Downes (1875) 1QBD 25; National Assistance Board v Prisk [1954] 1WLR 443). That, in their Lordships' view, is the meaning to be attributed to "wilful neglect" in section 130(2) of the Income Tax Act 1995.
42. The Tribunal's finding of wilful neglect appears to their Lordships to have been based on little more than the undoubted fact that information about his morcellement receipts was not disclosed by the taxpayer to the Commissioner. On page 8 of the Determination (page 15 of the Record) the Tribunal referred to the incomplete return for the year 1989/90, to the information received by the Commissioner from other sources in 1994 and then commented

"There was indeed a failure on the part of the Appellant to disclose information regarding compensation he had received at the relevant period of time."

This finding of a "failure … to disclose" led to the Tribunal expressing their "considered view that this concealing of information" (emphasis added) entitled the Commissioner to raise assessments under section 130(2). There was no reasoning that explained the leap from a finding of a failure to disclose to the conclusion that there had been a deliberate concealing of the information.

43. There was no express finding by the Tribunal that the taxpayer's failure to disclose had been intentional or purposive nor that the taxpayer must have known that he had a duty to disclose in his tax returns the morcellement payments he had received. It may be said that the Tribunal's expressed view that there had been a "concealing" of this information represents an implied finding that the taxpayer knew he had a duty to disclose and had intentionally failed to do so. In their Lordships' opinion that is not good enough. A taxpayer who is to be found guilty of "wilful neglect" is entitled to express findings of the primary facts that, in the Tribunal's view, justify the "wilful neglect" conclusion. A finding of no more than a "failure" is not enough.
44. The Supreme Court upheld the Tribunal's finding of wilful neglect. They did so on the footing that the finding was justified by the provisional and incomplete 1989/90 return and by the taxpayer's failure "to provide additional information as requested". But the Tribunal had made no finding that there had been such a request or when it had been made or that the taxpayer had failed to respond to it. And even if there had been such a failure, a failure does not, without more, constitute "wilful neglect".
45. In their Lordships' opinion the findings necessary to justify a conclusion that wilful neglect had been established against the taxpayer were absent. It follows that the making of the assessments for 1989/90 and 1990/91 cannot be justified by reliance on section 130(2). The assessments were out of time.

Conclusions

46. It follows that, in their Lordships' opinion, the assessments for 1989/90 and 1990/91 should be set aside. The question as to what should be done about the other four assessments is not so straightforward. The simple course would simply be to strike out from each of the assessments the entry relating to the taxpayer's morcellement receipts. The tax due could then be re-calculated accordingly. Alternatively it might be possible to allow the Commissioner to amend the assessments by substituting for the present entries relating to the taxpayer's morcellement receipts entries representing the Commissioner's estimate of the profit element in the receipts. He could make this estimate "according to the best of his judgment" by deducting from the receipts a sum equal to 50.04 per cent of the market value of the 75 arpents prior to the implementation of the morcellement scheme. For the avoidance of doubt their Lordships' opinion is that the sum to be deducted should reflect the then existing development potential of the land. If the taxpayer wishes to challenge the Commissioner's estimate, the case would have to be remitted to the Tax Appeal Tribunal for that purpose.
47. Their Lordships have not had any submissions from counsel as to whether amendment of the assessments in the manner suggested is possible or, if it is, what procedural steps may need to be taken. In the circumstances their Lordships allow the appeal and remit the case to the Supreme Court to be disposed of in accordance with this opinion. The Commissioner must pay the costs of this appeal.