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Cooper (Inspector of Taxes) v. Stubbs

[1925] 2 K.B. 753
[1925] All ER 643

(Judgment by: POLLOCK M.R.)

Between: Cooper (Inspector of Taxes)
And: Stubbs





Subject References:
Income Tax
Speculations in Cotton
Contracts for future Delivery
Practice of Cotton Brokers
Gambling Transactions
Trade or Vocation
Income Tax Act, 1918 (8 & 9 Geo. 5, c. 40), Sch. D, para. 1 (a) (ii.), (b); Cases I. and VI.

Legislative References:
Income Tax Assessment Act 1918 - 149; Schedule D

Case References:
Cape Brandy Syndicate v. Inland Revenue Commissioners - [1921] 2 K. B. 403
Partridge v. Mallandaine - [1886] 18 Q. B. D. 276
Graham v. Green - [1925] 2 K.B. 37
Erichsen v. Last - [1881] 8 Q. B. D. 414
Thacker v. Hardy - (1878) 4 Q. B. D. 685
Currie v. Inland Revenue Commissioners - [1921] 2 K. B. 332
Ryall v. Hoare - [1923] 2 K. B. 447
Coman v. Governors of Rotunda Hospital, Dublin - [1921] 1 A.C. 1
Attorney-General v. Black - (1871) L. R. 6 Ex. 78, 308
Inland Revenue Commissioners v. Greenwood - [1921] 2 A.C. 171

Judgment date: 30 June 1925

Judgment by:

This is an appeal by Henry Stubbs against a judgment of Rowlatt J., who held that he was liable in respect of three assessments to income tax made upon him in the years 1921, 1922 and 1923, upon sums respectively in these years amounting to 1982 £ , 4200 £ and 4302 £ It appears that the appellant is a cotton broker, and during the years in question he was a partner in a firm which was carried on by him in company with members of his family. There were three partners in the first year, but Richard Stubbs, Senior, died, and then the business was carried on by Richard Stubbs, Junior, and the appellant until some time in October, 1922, when upon the death of Richard Stubbs, Junior, the business came to an end. The appellant apparently after October, 1922, ceased business for about six months and then resumed it, beginning again in a period which, I suppose, is outside the period of assessment, and was something like April, 1923, which would be a period falling for assessment to tax 1923-24.

Now during those three years in which the assessments were made upon him we have been told by the case which has been stated by the Commissioners the mode in which the business of the partnership was carried on upon the Liverpool Cotton Exchange, but no question arises as to the assessment of the firm upon the trade carried on by the firm. The reason why we have been told by the Commissioners how business is carried on by cotton brokers is in order to make a contradistinction between the business of the firm and the business which it is now said the appellant is liable to pay tax upon. It appears that the appellant in addition to the business which was carried on by the firm, of which he was a partner, had individual and separate private transactions. Those transactions were in respect of future delivery contracts which he entered into, and during the material years we are told that the appellant entered into these future delivery contracts without any intention of taking up actual cotton or of using the contracts as hedges for actual transactions in order to safeguard his position, whatever the price of cotton might be in the future, but they were entered into as speculative transactions, and they are stated by the Commissioners to be in their opinion nothing more nor less than gambling in differences.

It is important to observe what those transactions were. They were contracts for future delivery. They were transactions of which his partners had knowledge, but in which they had no interest. Nearly all the transactions were done through the appellant's own firm, and that firm, except in the last year, charged him brokerage on buying or selling contracts. It appears that on the Cotton Exchange it is a common practice to make future delivery contracts sometimes for the purpose of testing the market, sometimes for the purpose of hedging against actual business done; but in the contracts which are the subject matter of this assessment the appellant's transactions were carried out a little differently from those transactions, because he kept his contracts open generally for more or less lengthy periods, whereas the firm's speculative or testing transactions, whichever they are to be termed, were invariably closed on the same day. Now the number of the appellant's transactions was considerable. In the several years in respect of which assessments are made there were thirty-eight in the first year, fifty-one in the second, and sixty-one in the third. The profits which were derived from these transactions were also considerable, for the figures which I have already recounted indicate that in the first year something like a profit of 2000 £ was made, whereas in the subsequent years a profit of over 4000 £ was made. Inasmuch as that class of business showed a personal profit or gain to the appellant, it would appear, prima facie, that the Commissioners would be right in assessing him in respect of those profits and gains so made. But it is claimed that, in fact, they were mere gambling transactions, that the appellant was not a person who carried on the business of gambling in the sense that a bookmaker carries on the business of gambling and is assessable to income tax, and that they were a number of transactions carried on for the purpose of obtaining fortuitous gains if possible, but that they must be treated and considered as quite apart from anything like his business or any business in which he was engaged, and so are not part of his profits or gains for the several years of assessment.

Now those are the facts. The difficulty that we have in this case is as to what has been found by the Commissioners who have stated the case which went before Rowlatt J. The Commissioners came to the conclusion that the dealings which are in question were gambling transactions, and that the profits arising from them were not annual profits assessable to income tax.

It is perfectly clear that the Commissioners are the judges of the facts. It is for them to find the facts. The Court - whether the Court of first instance before whom the case stated comes or the Court of Appeal - are bound by the facts which have been found by the Commissioners, and if they have rightly directed themselves in law their decision cannot be interfered with. Rowlatt J. came to the conclusion, as I understand his judgment, that the Commissioners had not rightly directed themselves in law, and he held that the appellant was liable to be assessed in respect of these profits and gains. It has been forcibly and strenuously argued that the Commissioners, in coming to that conclusion, did so on a question of fact, and that Rowlatt J. was not entitled to set aside their decision, and equally that this Court is disabled from so doing; but after very careful consideration I have come to the conclusion that the ground on which the Commissioners have based their decision is not sound in law and therefore is capable of being reviewed, and must be reviewed by the Court before whom the special case comes. The Commissioners' finding of fact is contained in para. 11 of their case, and it is as follows: "We held that the respondent did not deal in future delivery contracts so habitually and systematically as to constitute these dealings the carrying on of a trade, and that the profits arising therefrom were accordingly not assessable under Case I. of Schedule D." Case I. is the ordinary case under which annual profits or gains are subjected to income tax. The Commissioners proceed: "We further held that the dealings were gambling transactions, and that the profits arising therefrom were not annual profits assessable under Case VI. of Sch. D." Case VI. is what has been termed before now the sweeping up clause, which refers to annual profits or gains not comprised in or embraced under any of the previous Cases.

I do not think that the Commissioners intend that their two findings are to be antithetic or that we are to take it that they have found that it is not the carrying on of a trade because it was gambling, but I think one must take these two findings separately. Even so, however, it appears to me that in their first finding the Commissioners have not rightly directed themselves in law. It does not appear to me that a habit or system were characteristics necessary to finding that there was a trade in this case. The appellant carried on a trade or business. He was a cotton broker, and he had the means and the knowledge for engaging in certain transactions upon the Cotton Exchange according to his own business ability and experience, and he entered into a number of transactions which were real transactions. It is clear from Thacker v. Hardy 4 QBD 685 and other cases that these future delivery contracts which are made upon the Cotton Exchange or the contracts which are made upon the Stock Exchange in London are real contracts in the sense that the party with whom they are made is a real party, and if the dealer or broker making them should desire at any moment to have the contract implemented he can do so. There is no distinction between contracts which are made for the purpose of speculative dealings and contracts which are made for the real purpose of securing the sale or purchase of stock or cotton. The appellant himself carried on the trade of a cotton broker, and had entered into a number of these real transactions. He was charged by his firm brokerage upon them. It may be that they were speculative in the sense that they were for his own purposes a speculation. It may be that in a loose and colloquial sense of the words they were gambling transactions, and that it may be said that he was gambling in making these contracts, but the purpose for which he made them did not alter the character or nature of the contracts that he did make: they were real transactions, although the purpose of them may have been in his mind, in respect of all or some of them, to fulfil his desire to gamble in speculative transactions. Testing these transactions from that point of view it does not appear that the habit or system affords a true test of whether or not they were such dealings as indicate a carrying on of a trade. Apparently the Commissioners considered that they were not so many or so habitually and systematically entered into as per se if taken alone to prove that this business, if treated as an independent business, was such a business as indicated a separate trade on his part; but the basis of their finding is that there was no habit or system in them. On the other hand, it is clear that these adventures were entered into by him successively in a number of years for large amounts. They amounted to a number of transactions, and in all it is important to remember that the contracts were real contracts, which no one except the appellant himself could treat or deal with otherwise than as real contracts. If he was minded at the end of his own time to close them, well and good; if, on the other hand, he was minded at any time to take delivery or to give delivery he could have done so. It appears to me, therefore, that the test that has been applied in this first limb of para. 11 of the case is not a true test in law, and therefore that the Commissioners have misdirected themselves in holding that this business so carried on by appellant did not constitute the carrying on of a trade. If it was the carrying on of a trade then he is liable under Case I. of Sch. D, and when one is dealing with the question whether a man is carrying on a trade it is important to notice the alternative words which are to be found in s. 237 of the Act of 1918, that trade includes "every trade, manufacture, adventure or concern in the nature of trade." The appellant was a cotton broker: he did enter into these transactions in the course of his business for his own purposes, but they were real contracts made for his own purposes and because he was a cotton broker. It appears that he did engage in trade in the sense in which that is to be understood, and therefore these profits fall to be assessed under Case I. of Sch. D.

The Commissioners go on to say: "We further held that the dealings were gambling transactions." I am not quite certain what they mean by that, and it is not necessary to decide. It appears to me rather that they have used the word "gambling" in some colloquial sense, as meaning that they were fortuitous profits obtained by these independent transactions - independent therefore from the necessary transactions of the business - and it may be that the second part of the finding is coloured by this, that there was not a system or habit in the gambling transactions so as to bring the appellant within the decisions under which a bookmaker is held to be carrying on a trade, and they also held that the profits arising from such transactions were not annual profits assessable under Case VI. of Sch. D. Case VI. sweeps in all other profits and gains which are not included in the other cases under Sch. D. But to my mind when rightly tested the contracts which were made by the appellant over these years in successive series of contracts do constitute a business, and it is not a right test in law to try and apply the touchstone of habit or system in order to ascertain whether or not a trade was carried on.

For these reasons it appears to me that the Commissioners misdirected themselves on the point that they had to consider, and that Rowlatt J. was right in the conclusion to which he came - namely, that the Commissioners having misdirected themselves the case fell within Case I. of Sch. D, and the appellant was liable to be assessed.

I would like to add that the claim was not only placed under Sch. D, para. 1 ( a ) (ii.), of the Act of 1918, but under Sch. D, para. 1 ( b ), which is the forerunner of Case VI., and it may well be that these profits or gains could be dealt with and be charged under Case VI. The simpler form, however, appeals to me, and I think the Crown is right in saying that the subject is entitled to know what is the specific Case under which he is charged, and if they do fall under Case I. it is unnecessary, and I think wrong, to put them under the lesser case rather than under the more specific one of Case I.

For these reasons, while I desire to adhere most closely to the rule that the Court ought not to interfere with the Commissioners on a finding of fact, I have come to the conclusion that the Commissioners have misdirected themselves, and that upon the facts as they have found them the true conclusion in law is that the appellant's dealings are such as to constitute a trade, adventure or concern in the nature of trade and to bring these dealings, entered into it may be for his own purpose and in his own mind as speculative transactions, within the charge under Case I. Therefore the assessments have been rightly made, and the appeal must be dismissed with costs.

Case Judgement
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  Judgment by POLLOCK M.R.
  Judgment by WARRINGTON L.J.
  Judgment by ATKIN L.J.

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