Wisdom v Chamberlain (Inspector of Taxes)

[1969] 1 All ER 332

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Between: Wisdom
And: Chamberlain (Inspector of Taxes)

Court:

Judges: Harman J
Salmon LJ
Cairns J

Subject References:
INCOME TAX
Casual profit on hedge against devaluation
Purchase of silver bullion
Profit on re-sale
Finding that other considerations influenced purchase unsupported by evidence
Whether adventure in the nature of trade

Legislative References:
Income Tax Act 1952 - (15 & 16 Geo. 6 & 1 Eliz 2 c 10), Sch D, Case I

Case References:
Edwards (Inspector of Taxes) v Bairstow - [1955] 3 All ER 48; [1956] AC 14; [1955] 3 WLR 410; 36 Tax Cas 207; 28 Digest (Repl) 396, 1763
Inland Revenue Comrs v Livingston - (1927) 11 Tax Cas 538; 1927 SC 251; 28 Digest (Repl) 45, 121
Jenkinson (Inspector of Taxes) v Freedland - (1961) 39 Tax Cas 636; Digest (Cont Vol A) 850, 173n
Leeming v Jones (Inspector of Taxes) - [1930] 1 KB 279; 99 LJKB 17; 141 LT 472, affd HL, sub nom
Jones (Inspector of Taxes) v Leeming - [1930] AC 415; [1930] All ER Rep 584; 99 LJKB 318; 143 LT 50; 15 Tax Cas 333; 28 Digest (Repl) 22, 87

Hearing date: 7 November 1968
Judgment date: 8 November 1968

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ORDER

Concerned at the possibility of a devaluation of the pound and its effect on the taxpayer's assets of £200,000, the taxpayer's adviser in 1961 decided to take steps to find a hedge against devaluation, ie an investment which in the event of devaluation would retain its value against dollars and would be saleable at a profit which would stop the hole made by any devaluation of sterling assets. He decided to buy ingots of silver, which had not varied in value more than 5 per cent over the previous six years and on devaluation could be sold at a profit against dollars. Owing to a sudden rise in the price of silver he was able to purchase only £100,000 worth of silver at the time, the purchase being financed by a payment of £10,000 in cash by the taxpayer and by a banker's loan at high rates of interest which were less unprofitable to the taxpayer because he was a high surtax payer. Six months later the plan was changed by a further transaction, under which the first transaction was undone at a loss of £3,000 to the taxpayer, and the full £200,000 worth of silver was purchased on somewhat different terms. By the autumn of 1962 the prospect of devaluation of sterling had disappeared, but the price of silver had gone up and in October 1962 and January 1963 the taxpayer sold the silver ingots at a profit of £48,000. He was assessed to tax on the basis that the sum was a taxable profit.

On appeal, the General Commissioners of Income Tax found as follows:

(i)

the taxpayer's original intention was to purchase the silver as a hedge against devaluation; but

(ii)

at the time of the second transaction other considerations influenced the purchase, the fear of devaluation having subsided;

(iii)

the commodity was useless, left unallotted in the hands of brokers, was not an income-producing investment nor a long-term investment, was financed by loans at a high rate of interest, and no organisation was needed to deal in it as that was provided by brokers; and

(iv)

whether there was a single transaction or two, by the nature of the subject-matter, there was an adventure in the nature of trade and the profit was therefore assessable under Case I of Sch D to the Income Tax Act 1952. Goff J held that the commissioner's decision was vitiated by the finding that the second purchase was influenced by other considerations, of which there was no evidence, and that as a matter of law the transaction was not an adventure in the nature of trade but was a security to protect the taxpayer against devaluation.

Held

The taxpayer's profit was properly found to be taxable by the commissioners on the following basis-

(i)

although there was admittedly no evidence to support the commissioners' second finding that different considerations affected the second transaction, and the motive behind that transaction must be taken to be the same as that behind the first, ie to provide an insurance against devaluation, the decision that the transactions were in the nature of trade applied to it independently of that finding (see p 336, lettersd and h, p 337, letter b, p 338, letter h, and p 389, lettersb and c, post);

(ii)

because even if the transaction (or the transactions) were a hedge against devaluation, it was nevertheless a transaction entered into on a short-term basis for the purpose of making a profit out of the purchase and ( [1969] 1 All ER 332 at 333) sale of a commodity, and as the commissioners' decision was amply supported by the evidence it could not be interfered with (see p 336, lettersg and h, p 337, letter b, p 338, letter i, and p 339, letters e and f, post).

Appeal

The taxpayer appealed to the General Commissioners of Income Tax for St Martins-in-the-Fields, Westminster, against an assessment made on him under Case I of Sch D to the Income Tax Act 1952 for 1962-63 in the sum of £48,000 in respect of "profits of trade, etc, of sales and dealer in silver". The question for determination was whether the taxpayer had carried on a trade or an adventure in the nature of trade. The facts of the case are stated in the judgment of Harman LJ (p 334, letter g, to p 335, letter h, post). The taxpayer contended as follows:

(a)

that the profit which was assessed to income tax was the result of an isolated casual transaction;

(b)

that the profit was not a trading profit but an accretion to capital;

(c)

that all the circumstances, including the nature and substance of the transaction, had to be considered;

(d)

that the statement by Mr R L Major dated 30 September 1964, showed the financial position of the United Kingdom from March 1961, onwards, and the possibility of devaluation;

(e)

that the nature of the commodity which was the subject of the taxpayer's transaction, ie silver, did not lend itself to commercial speculation by a private individual;

(f)

that the price of bar silver had not varied except by very small amounts over the last six years, and although the inspector of taxes had produced extracts from The Times dated 31 October 1961, forecasting a rise in the price of silver over the next 12 months (which extracts the taxpayer's accountant had not read), the price of silver in fact hardly moved between 31 October 1961 and 29 November 1961;

(g)

that silver was not a commodity which the taxpayer would have bought had he intended to make a quick profit;

(h)

that the object of the transaction was to obtain protection against devaluation, and was not to make a profit but to minimise possible loss;

(i)

that the possible fall in the price of silver was provided for, and the profit was not certain;

(j)

that Mocatta & Goldsmid Ltd, the brokers with whom the taxpayer dealt, protected themselves against a fall of more than 4d so that even they did not think that it was obviously bound to be profitable; and

(k)

that the two transactions involved were really only one transaction implementing the original intention to acquire £200,000 worth of silver as a hedge against devaluation.

The Crown contended as follows:

(i)

that the taxpayer had carried on a trade or an adventure in the nature of a trade and made profits therefrom which were assessable under Case I of Sch D to the Income Tax Act 1952; and

(ii)

that the amount of the assessment should be determined accordingly. The inspector of taxes made the following submissions in support of the contentions:

(a)

that the interval between the purchase and the sale was short;

(b)

that the asset ( [1969] 1 All ER 332 at 334) was not acquired for cash, but was financed by loans;

(c)

that the nature of the asset was something which could not be used, it gave no pride of possession such as a work of art, and did not create an income but was purchased with the intention of re-selling at a profit;

(d)

that it was clear that it was not intended that the silver should be held for a long period as the interest would have been far too heavy a burden and there was no income to offset that;

(e)

that where profits or gains were made from an investment which was made for the purpose of gain, even if it was speculation, it was an adventure in the nature of trade;

(f)

that from the extracts from The Times newspaper which were produced it was clear that it had been publicly stated, on 31 October 1961, that there must be a rise in the price of silver within the next 12 months and that there was at that time speculation in silver; and

(g)

that before the date of the second purchase of silver, at the beginning of April 1962, the fear of devaluation had passed.

The commissioners found ^[Fa] that there was an adventure in the nature of trade the profits of which were assessable under Case I of Sch D to the Income Tax Act 1952, and dismissed the appeal. On 11 March 1968, as reported at [1968] 2 All ER 714 , Goff J allowed the taxpayer's appeal by way of Case Stated against that decision, holding that the profits were not assessable to income tax. The Crown appealed to the Court of Appeal.