1933 (3) TMI 22 - HC - Income Tax

Summary

Issues Involved:
1. Liability to income-tax under Schedule B versus Schedule D for stud fees.
2. Interpretation and application of previous case law, particularly Malcolm v. Lockhart and McLaughlin v. Bailey.
3. Definition and scope of "occupation" under Schedule B.

Detailed Analysis:

1. Liability to Income-Tax Under Schedule B Versus Schedule D for Stud Fees:

The core issue in this appeal was whether the appellant was liable to income-tax under Schedule B or Schedule D for payments made to him for the service by his stallions of mares sent to his stud by outside owners. The appellant argued that he should only be taxed under Schedule B in respect of his occupation of the land and that the profits derived from the use of the stallions were not profits of a trade, adventure, or concern separate from and outside the purpose of such occupation.

Viscount Buckmaster noted that the occupation of the land for the purposes of the stud farm is an occupation within the meaning of Schedule B. He argued that the payment for the services of the stallion for use upon the land is as much a breeding operation as the production of the foal by the mare, and thus, the fees for the services of the stallion should be considered a normal part of the purposes for which the land is occupied and inseparable therefrom.

Lord Tomlin agreed, stating that there is no reason in logic for distinguishing between the profit derived from the reproductive capacity of the female and the profit derived from the reproductive capacity of the male. He concluded that the fees in question arise from the occupation of the land and are not taxable under Schedule D.

Lord Russell of Killowen emphasized that the normal receipts of a thoroughbred stud farm include stud fees received for the service by the stud farm stallions of mares which belong to other people. He argued that these stud fees are part of the gains of the appellant in respect of his occupation of the land and should be covered by the assessment under Schedule B.

Lord Wright elaborated that the services of the stallions are exactly the same in respect of visiting mares as in respect of the appellant's own mares. He argued that the profit or income is from the reproductive capacity of the animal, which is a product of the soil, and thus, the service of the stallion is appurtenant to the soil and a profit of the occupation.

2. Interpretation and Application of Previous Case Law:

Viscount Buckmaster discussed the case of Malcolm v. Lockhart, noting that the Court of Session treated the use of the stallion outside the farm as outside the purpose of the occupation. However, he argued that this case does not cover and dispose of the present case, as the occupation of the land in this case is for the purpose of a stud farm, and the use of the stallion upon the farm cannot be taxed unless it constitutes something distinct and separable from the purpose of the occupation.

Lord Tomlin concurred with the views expressed by Viscount Buckmaster on Malcolm v. Lockhart, stating that the decision has been too broadly interpreted in McLaughlin v. Bailey. He saw nothing in Malcolm v. Lockhart to prevent the conclusion that the fees in question arise from the occupation of the land and are not taxable under Schedule D.

Lord Wright also addressed Malcolm v. Lockhart, emphasizing that the decision was based on the special facts of that case and did not involve fees for serving mares on Malcolm's farm. He argued that the decision must be taken to be based on the special facts which involved that the fees in question were not a profit arising in respect of the occupation of that particular farm.

3. Definition and Scope of "Occupation" Under Schedule B:

Viscount Buckmaster argued that the occupation referred to in Schedule B is an occupation which, in itself and by its enjoyment, is the source of the income and profits to be taxed. He emphasized that a stud farm is plainly an occupation of the land, and the breeding and sale of foals arise from such occupation.

Lord Tomlin stated that the occupation of land for the purposes of a thoroughbred stud farm is an occupation the profits of which are covered by an assessment under Schedule B. He argued that the fees for allowing the stallion to cover the mare of another should not be distinguished from the profit derived from the reproductive capacity of the female.

Lord Russell of Killowen emphasized that the appellant has been assessed to tax upon his gains in respect of his occupation of the land for the purpose of a thoroughbred stud farm. He argued that the stud fees are part of the gains of the appellant in respect of his occupation of the land and should be covered by the assessment under Schedule B.

Lord Wright elaborated that the tax under Schedule B is charged in respect of the occupation of lands, tenements, and hereditaments. He argued that the services of the stallions are appurtenant to the soil and a profit of the occupation, and thus, should be covered by Schedule B.

Conclusion:

The appeal was allowed, and the assessment under Schedule D was discharged. The judgment concluded that the fees for the services of the stallions are part of the gains from the occupation of the land and should be covered by the assessment under Schedule B, not Schedule D.