Scottish Court of Session Decisions

The Income Tax Act 1843 (5 and 6 Vict. cap. 35), sec. 100, Schedule D, First and Sixth Cases, and the Income Tax Act 1853 (16 and 17 Vict. cap. 34), sec. 2, and Schedule B and D, are quoted supra in rubric.

William Taylor Malcolm, farmer, Dunmore Home Farm, Airth, appellant, being dissatisfied with an assessment made upon him for the year 1915–16 of £250 in respect of profits of the stallion “Prince Ossian” by the Commissioners for the General Purposes of the Income Tax Acts at Falkirk, took a case in which C. H. Lockhart, Surveyor of Taxes, Stirling, was respondent.

The assessment, which was made under the Income Tax Act 1842 (5 and 6 Vict. cap. 35), sec. 100, Schedule D, Case 6, and the Income Tax Act 1853 (16 and 17 Vict. cap. 34), sec. 2, Schedule D, was as follows:—“W. T. Malcolm—Profits of ‘Prince Ossian,’ £250.”

The Case set forth—“The following facts were admitted:—1. The appellant is the owner of an entire horse called ‘Prince Ossian’ which is used for breeding purposes, and in addition to serving appellant's own stock earns fees for serving mares of other owners. 2. When a foal the said horse ‘Prince Ossian’ was purchased by the appellant. He was reared and fed by him on Dunmore Home Farm as part of the stock of the farm on the produce of the farm. After reaching three years old he became suitable for breeding purposes. The animal is still fed and attended to by the ordinary farm servants in the employment of the appellant. 3. The appellant has used said horse since three years old during the breeding season for the service of agricultural mares in his own possession, and in addition he sells the services of the horse as a breeding animal to owners of agricultural mares who desire to mate their stock with him, at varying rates. Many mares are sent to Dunmore to be served by ‘Prince Ossian’ there, while in other cases the horse is sent under the care of the appellant's servant to the stables of the owners of mares and service effected there. 4. The breeding season

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extends from the month of April to the beginning of August, and during that period the horse is part of the time away from the farm, always under the charge and care of appellant's farm servant. The appellant pays for his keep during the period he is off the farm as well as the wages of the farm servant attending upon him, and all charges for shoeing and veterinary attendance. 5. For the season of 1915 ‘Prince Ossian’ was selected by the Stirlingshire Horse Society to serve mares belonging to the members of that society, but in addition he also served farm mares belonging to the appellant. The appellant received £2 and £4 as stud fees from the Stirlingshire Horse Society for each mare served and proved to be in foal, and in addition an initial payment of £60 from the society. He admitted that his gross earnings from the horse amounted to £290. 6. The appellant is tenant and occupier of the Home Farm of Dunmore, on the estate of Claude Archibald Mackenzie Bruce Hamilton, Esquire of Dunmore, at a rent of £580, where he breeds and maintains a stud of Clydesdale horses and also a herd of pedigree shorthorn cattle. He is assessed under Schedule B as tenant of the farm at £580, and by his return he has other sources of income amounting to £80 in dividends and £11 as a director's fee—total, £671. 7. The farm is a mixed one of 400 acres, and the appellant also rents grass parks to the extent of 100 acres. On the farm there are generally 30 horses, including 16 work horses, 8 entire colts and horses, and 6 breeding mares, 400 sheep, 30 bullocks, 8 bulls, 2 three-year-old bulls, 7 heifers, 8 cows, and 4 calves, and 20 yearling bulls. One other stallion besides ‘Prince Ossian’ is used for stud purposes, but it is not dealt with in this case.’

The judgment of the Commissioners was—“The Commissioners are of opinion that the appellant Mr Malcolm must be assessed upon the profits made by him out of the employment of his stallion in serving mares away from his own farm. The Commissioners think that such profits fall under either the First Case of Schedule D or the Sixth Case of the same schedule, 5 and 6 Vict. cap. 35, sec. 100. The profits in question may very fairly be considered to fall under the First Case, but if not the Commissioners are firmly of opinion that they fall under the Sixth Case. It does not appear to the Commissioners that the employment of a stallion in the manner disclosed in this case can be said to fall within the terms of Schedule B. The employment of a stallion for stud purposes for hire outside of his own farm is no part of the business of a farmer. The Commissioners see no reason for holding that before a party in the occupation of land chargeable under Schedule B can be charged under Schedule D it is necessary for the Crown to show that he is carrying on a separate business. There is no substance in the contention that businesses are to be charged separately (except in so far as the provisions of section 101 of the Income Tax Act 1842 are applicable). The Income Tax Act is to be taken as a whole. The opinion of Lord Macnaghten in London County Council v. Attorney-General, [1901] AC 26, 36, 37, is referred to. There it is made clear that the view that the schedules are to be considered as if they were separate enactments is not sound. The case also of Brown v. Watt, February 20, 1886, 13 R. 590, and Earl of Derby v. Aylmer, [1915] 3 K.B. 374, may also usefully be referred to in this connection. As the actual amount of profit made by Mr Malcolm is not admitted or ascertained the Commissioners will hear the parties now on this matter, or continue the case for the adjustment of the amount. This is necessary if the appellant is not satisfied with the determination of the Commissioners and desires to have a special case stated. In the event of a special case being requested the facts must be clearly determined and the amount of the assessment fixed.”

Thereafter the appellant having failed to offer proof of the net earnings of “Prince Ossian,” the above assessment was confirmed.

Argued for the appellant—Primarily income tax payable by a farmer as such was regarded as an assessment in respect of the occupation of lands, and was estimated broadly and assessed upon his rental—Income Tax Act 1842 (5 and 6 Vict. cap, 35), sec. 63, Schedule B; Income Tax Act 1853 (16 and 17 Vict. cap. 34), sec. 2, Schedule B. That method of assessment still prevailed, though one-third of the rental was adopted as the basis of assessment for a time—Finance Act 1896 (59 and 60 Vict. cap. 28), sec. 26 (1). The full rental was restored later—Finance (No. 2) Act 1915 (5 and 6 Geo. V., cap. 89), sec. 22. But while the rent continued to be taken as the estimate for income tax purposes, the farmer was given the option to treat his farming like any other business, and to make a return of his actual profits, and claim to be taxed under the Act of 1842, section 100, Schedule D, and the Act of 1853, section 2, Schedule D—Customs and Inland Revenue Act 1887 (50 and 51 Vict. cap. 15), sec. 18. The taxes imposed under Schedule B were in respect of the occupation of lands, and a farmer as such might be assessed under that schedule; the taxes imposed by Schedule D were in respect of the profits of a trade or occupation, and Case 6 under the Act of 1842 applied to all such annual profits not otherwise covered. The option to make a return of actual profits for assessment under Schedule D lay entirely with the farmer, and in the present case he had not exercised that option, and accordingly fell to be assessed under Schedule B. The mere fact that the appellant kept a stallion and made profit out of it did not make him a proprietor of a business separate and distinct from farming which was assessable under Schedule B. A farmer might quite well engage in another business besides husbandry, and in respect of that business become assessable under Schedule D— e.g., selling milk—1842 Act, section 100, Schedule D, Third Case (3)—but the keeping of a stallion was quite a common and usual thing on a farm, and was incidental to the husbandry and as much a part of it as the raising of crops,

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and accordingly the profits were included in and completely covered by the taxes imposed under Schedule B. To charge the farmer under Schedule B, and in addition in respect of the profits of the stallion under Schedule D, would be to charge him twice in respect of the same thing. Further, the payment for the serving of mares was regarded as a cost incidental to husbandry, and therefore the fee for the service of the mare should also be regarded as a return from husbandry. Here the stud business was merely incidental to the husbandry, and was not so disproportionate to the farming business as to merge the agricultural business in it. The Earl of Derby v. Aylmer, [1915] 3 K.B. 374, was distinguished, for there the business was admittedly a stud business, not a farm, and chargeable under Schedule D. Further, the method of taking the rental as the estimate of the profits was adopted owing to the difficulty of arriving at the net profits. Here it would be impossible to segregate the net profits of the stallion from the rest of the farming business. Further, if the respondent was right, and a farmer as such was to be assessed under Schedule B for his husbandry, and under Schedule D for the profits of a stallion, if the farmer made a loss on his farm, he could not set off that loss against the profits of the stallion— Brown v. Watt, 1886, 13 R. 590, 23 S.L.R. 403. The appellant should be assessed only under Schedule B. The London County Council v. The Attorney-General, [1901] AC 26, per Lord Macnaghten, at pp. 36 and 37, and Dowell, Income Tax Laws, 7th edn. pp. 181, 184, 237, 300, 310, 444, were referred to.

Argued for the respondent—The appellant was assessable in respect of the profits upon the stallion under Schedule D. The sole question was whether the profits of the stallion were part of the income derived in respect of the occupation of land. That was a question of degree, and it was immaterial whether the mares were served at the farm or not. The selling of surplus products of the farm— e.g. milk, butter, and eggs—would not result in an income which was not in respect of the occupation of the land. What was contemplated primo loco in Schedule B was the return derived from applying labour to the land and thereafter invoking the aid of nature. But here the stallion was selected by a society, and was available to anyone who paid the fee. Apart from that the stallion might be advertised to stand at a certain place, or even at Dunmore, to serve mares for anyone who paid the fee. That had nothing to do with the occupation of land; it was a distinct business in which the appellant had become a hirer out of a moveable. No doubt the. stallion served brood mares on the farm, and was fed there, but when the gross income derived from the stallion amounted to £290 it had ceased to be a mere overflow of surplus from the farming business, and had become a trade in itself. Further, the use of the stallion was not merely occasional, but it was regularly employed. On the same principle a farmer who did occasional carting, or lent a horse to a neighbour occasionally, would be assessable under Schedule B, but when the carting or lending had become regular and considerable, and the horses so used worked only incidentally upon the farm, the farmer had become a jobmaster, and was assessable under Schedule D. The same applied when the lessor of land turned it into a golf course— Carlisle and Silloth Golf Club v. Smith, [1913] 3 KB 75.

At advising—