[COURT OF APPEAL]

MASON (INSPECTOR OF TAXES) v. INNES

Revenue - Income tax - Profits of profession - Copyright - Gift of copyright by author - Whether author's copyright analogous to stock-in-trade - Value not attributable in professional accounts -

[Reported by THEODORE WALLACE, ESQ., Barrister-at-Law.]

Income Tax Act, 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), Sch. D, Case II.

The taxpayer, an author, travelled extensively to gather material for his works and was allowed the expenses as a deduction in his accounts. On April 4, 1960, he assigned the copyright in a book, then in typescript form, to his father as a gift. He had gathered material subsequently used in the book on a visit to the Persian Gulf in 1953; the book was started in 1958. It was desirable for the taxpayer to write a new book every few years to keep his name before the public. The market value of the copyright at the date of assignment was £15,425. The taxpayer's accounts for the year to April 5, 1960, in accordance with standard practice, were prepared on a cash basis. No receipt was brought in for the disposal of the copyright in the taxpayer's accounts.

An additional assessment was made on the taxpayer under Case II of Schedule D for the year of assessment 1960-61, on the ground that the market value of the copyright ought to be included as a receipt in the taxpayer's accounts, under the principle in Sharkey v. Wernher (infra). The taxpayer appealed to the special commissioners, who allowed his appeal. Goff J. dismissed the Crown's appeal, holding that the principle in Sharkey v. Wernher did not apply to the professional man with no stock-in-trade.

On appeal by the Crown:-

Held, that it was a general principle of income tax law that a man was taxed on the basis of what he received and not on what he might have received; that Sharkey v. Wernher was an exception confined to the trader with stock-in-trade and accounts on an earnings basis and did not apply to a professional man who had no stock-in-trade and whose accounts were properly kept on a cash basis; and that, therefore, the value of the copyright did not fall to be treated as a receipt of the taxpayer's profession and, accordingly, the appeal failed.

Sharkey v. Wernher [1956] A.C. 58; [1955] 3 W.L.R. 671; [1955] 3 All E.R. 493; 36 T.C. 275, H.L.(E.) distinguished.

Decision of Goff J. ante, p. 436; [1967] 2 W.L.R. 479; [1967] 1 All E.R. 760 affirmed.

APPEAL from Goff J.¹

The taxpayer, Ralph Hammond Innes, appealed to the special commissioners against an additional assessment to income tax under Case II of Schedule D for the year 1960-61 made upon him in the estimated amount of £17,500.

The following are the relevant paragraphs of the case stated by the commissioners.

1 ante, p. 436; [1967] 2 W.L.R. 479; [1967] 1 All E.R. 760.

3. The taxpayer had carried on the profession of an author for many years. Since 1951 a novel by him had been published at intervals of two years as follows: 1952, Campbell's Kingdom; 1954, The Strange Land; 1956, The Mary Deare; 1958, The Land God Gave Cain; October 1960, The Doomed Oasis; September, 1962, Atlantic Fury. There was also published in January. 1960, a travel book entitled Harvest of Journeys.

In order to obtain material for his works the taxpayer travelled extensively about the world and was allowed the expenses of this travel as a deduction in the computation of his liability to income tax.

The taxpayer's father retired from his employment in 1939. His financial resources were modest and some years prior to April 4, 1960, the taxpayer had formed the intention of assigning to him the rights in respect of one of his books.

As a result of material gathered by the taxpayer during a visit to the Persian Gulf in 1953 he commenced, in September, 1958, to write the book subsequently entitled The Doomed Oasis. He worked on this until the spring of 1959 and, after an interval, resumed work in September, 1959. By April 4, 1960, he was engaged in the final revision of the book, which was then in typescript but had not been submitted in any form to a publisher. Prior to this date the taxpayer decided that he would assign the rights in respect of this book to his father as a gift. He was unable to state with any particularity when this decision was made, but on April 4, 1960, he executed an assignment in favour of his father in consideration of "natural love and affection." Except that the rights in The Doomed Oasis were disposed of by way of gift the work was produced by the taxpayer in the same manner as his other works.

There were included in the deductions claimed by and allowed to the taxpayer for the purposes of income tax (a) the expenses of his journey to the Persian Gulf; (b) a salary of £400 per annum paid to his wife for assisting him in the writing of his books, including The Doomed Oasis; (c) a proportion of the cost of rates, insurance, electricity, cleaning and fuel in respect of his residence where part of his writing (including work on The Doomed Oasis) was done. The same proportion of this cost was allowed in each year and no adjustment was made as regards work on The Doomed Oasis.

If the taxpayer did not write a new book within three or four years after the publication of a previous work the public would

become less aware of his name and the sales of previous publications would fall. It was, therefore, an advantage to him for The Doomed Oasis to be published notwithstanding his assignment of the rights to his father.

The rights in The Mary Deare and The Strange Land were assigned by the taxpayer before publication by way of gift to his mother-in-law and mother, respectively. The Mary Deare proved to be the most successful of his works. The market value of the rights in The Doomed Oasis at the date of disposal was £15,425.

The profit and loss ,account of the taxpayer's professional activities for the year ended April 5, 1960, and previous years showed the actual receipts of his profession and the actual expenditure. The accounts were sent to H.M. Inspector of Taxes in this form and assessments to income tax were made by reference to these accounts.

In the opinion of Mr. Pooles, the chartered accountant who dealt with the respondent's income tax affairs, it was correct accountancy procedure for the accounts of an author to be prepared on a "cash basis" and he did not think any other method would be appropriate.

5. It was contended on behalf of the taxpayer (1) that it was not proper to assess the taxpayer to income tax in respect of profits which he did not make. (2) That the decision in Sharkey v. Wernher² did not apply to the carrying on by the taxpayer of his profession but applies only to the case of a trader with stock-in-trade the value of which was required to be brought into account in computing profits for the purposes of income tax. (3) That the decision in Sharkey v. Wernher² did not apply where profits were computed for the purposes of income tax by reference to actual receipts and expenditure, i.e., on a "cash basis." (4) That the carrying on by the taxpayer of his profession did not bring stock-in-trade into existence. (5) That as the rights in The Doomed Oasis were intended to be assigned by the taxpayer by way of gift to his father, the taxpayer's activities in producing the book did not take place in the course of his profession of an author. (6) That the appeal should be allowed and the assessment discharged.

6. It was contended on behalf of the Crown (1) that the effect of the decision in Sharkey v. Wernher² was not limited to cases

2 [1956] A.C. 58; [1955] 3 W.L.R. 671; [1955] 3 All E.R. 493; 36 T.C. 275, H.L.(E.).

in which there was a disposal of stock-in-trade by a trader. (2) That the taxpayer in the course of his professional activities had produced and disposed of a valuable asset, namely, the rights in The Doomed Oasis. The principle of the decision in Sharkey v. Wernher³ applied to this disposal and the market value of those rights, namely, £15,425, ought accordingly to be included as a receipt in computing the taxpayer's income tax liability. (3) That all the taxpayer's activities in producing The Doomed Oasis were carried out in the course of his profession of an author. (4) That the appeal should be dismissed and the assessment adjusted to £15,425.

The commissioners found that the writing of The Doomed Oasis and the disposal of the rights therein took place in the course of the carrying on by the taxpayer of his profession of an author; that the rights in The Doomed Oasis were not stock-in-trade; that the "cash basis" of accounting was appropriate, and that the decision in Sharkey v. Wernher,³ which was concerned with stock-in-trade valued for accounting purposes at the beginning and end of each year, was not applicable. The commissioners, accordingly, dismissed the appeal.

The Crown appealed. Goff J. held that Sharkey v. Wernher³ was an exception to the basic principle that income tax is a tax on what has been received or earned, not on what might have been; that the case of a professional man with no stock-in-trade was not analogous to that of a trader; and that, therefore, the principle of Sharkey v. Wernher,³ which was concerned with stock-in-trade, did not apply to an author disposing of his copyright by a gift, and, accordingly, that the appeal failed.

The Crown appealed.

H. H. Monroe Q.C. and J. Raymond Phillips for the Crown. The book was produced in the course of the taxpayer's profession as an author but was given away outside the course of his profession: the value should be included as a receipt for tax purposes. The principle of Sharkey v. Wernher³ applies to this case. It has been said that that case is limited to stock-in-trade and the earnings basis of accountancy, but the trader or professional man who diverts to his own use the product of his labour and skill

3 [1956] A.C. 58; [1955] 3 W.L.R. 671; [1955] 3 All E.R. 493; 36 T.C. 275, H.L.(E.).

receives the value of what is diverted just as much as the trader or professional man who sells his product for a fee. The proposition is limited to the case where the disposal is not a disposal for the purposes of the trade or profession but is a private or personal disposal. It may be commercially expedient for a trader to make free gifts. An artist might paint his wife in such circumstances that it was quite outside his profession, or he might paint a picture within his profession and give it to a benevolent fund thereby benefiting professionally; in those circumstances there would not be a receipt. But if a picture is painted in the course of the artist's profession and the artist then decides to give it away to a friend, there would be a receipt. If a barrister appears for no fee or a nominal fee, maybe appearing for the Crown, that may be properly regarded as part of his professional obligations; again a surgeon would often perform an operation free out of a sense of professional obligation. There may be a distinction between the rendering of services and the case where an asset is produced.

[RUSSELL L.J. What if the taxpayer threw his transcript away for some eccentric reason?]

He faces the same liability in principle. But if he destroyed it because he thought it was a bad book and would harm his reputation, then that would be in the course of his profession.

Although there is a primary principle that it is wrong to tax a taxpayer on what he has not received, Petrotim Securities Ltd. v. Ayres⁴ shows that it is only of limited application. Has a taxpayer been taxed on the "full amount" of profits or gains if a gift of copyright is left out? It is true that the spreading provisions of the Income Tax Act, 1952, section 471 do not cover a gift, but is that any more anomalous than Lady Zia Wernher being taxed and the author not being taxed?

Any distinction based on a profession as opposed to a trader would give rise to great difficulties. Is there to be a distinction between the seller of patent medicines who drinks his own medicine and the country doctor who dispenses and drinks his own medicine? Would a skilled furniture-maker be classed as a trader or not?

It is clear from the whole judgment of Viscount Simonds in Sharkey v. Wernher⁵ that he did not decide on the issue of quantum alone, he also considered whether anything at all had to be brought in.

4 [1964] 1 W.L.R. 190; [1964] 1 All E.R. 269; 41 T.C. 389, C.A.

5 [1956] A.C. 58, 66.

There is a finding of fact that the book was produced in the course of the taxpayer's profession; the position was thus the same as that considered by Lord Radcliffe.⁶

It is suggested that the principle is confined to the self-supplier, but that would be quite illogical. "The trader's choice is itself the receipt."⁷ Nor should the accountancy basis adopted make all the difference; there is no difference in kind between the different ways of recording profits. Where a trader consumes stock it is not material whether he had that stock at the last accounting date and it thus appeared in the balance sheet.

[RUSSELL L.J. I cannot see how a grocer would have a cash basis or how an author could have anything but a cash basis.]

Even where a cash basis is appropriate there are variations as in the treatment of royalties due but not paid.

It is not the Crown's submission that an author's copyright is stock-in-trade. Once it is established that an asset has been produced in the course of the taxpayer's profession, it is covered by Petrotim Securities Ltd. v. Ayres,⁸ which also shows that Sharkey v. Wernher⁹ goes beyond the self-supplier.

Withers v. Nethersole¹⁰ was a case of a post-cessation receipt and Stainer's Executors v. Purchase¹¹ and Carson v. Cheyney's Executor¹² were both cases of post-cessation receipts after death.

The revenue would be reluctant to agree that a profession has ceased, but if the present taxpayer had ceased his profession before assignment there would have been no assessment; the situation would not be covered by the Finance Act, 1960, ss. 32 to 35. The issue in Carson v. Cheyney's Executor¹² was very different from the present case; but Lord Keith's analysis¹³ shows that there is a real sense in which it is appropriate to analyse the author's activity as the production of something in the course of his profession. The difficulty of concentrating on whether that something is stock-in-trade is that the dividing line of whether or not it is stock-in-trade is so uncertain; to decide tax liability by whether a potter is a tradesman or an artist is to apply a value judgment which should be totally irrelevant to tax.

Lord Clyde in Inland Revenue Commissioners v. Morrison¹⁴ presented the two modes of computation as no more than methods

6 [1956] A.C. 58, 83.

7 Ibid. 85.

8 [1964] 1 W.L.R. 190.

9 [1956] A.C. 58.

10 (1948) 64 T.L.R. 157; [1948] 1 All E.R. 400; 28 T.C. 501, H.L.

11 [1952] A.C. 280; [1951] 2 T.L.R. 1112; [1951] 2 All E.R. 1071; 32 T.C. 367, H.L.

12 [1959] A.C. 412; [1958] 3 W.L.R. 740; [1958] 3 All E.R. 573; 38 T.C. 240, H.L.

13 [1959] A.C. 412, 435.

14 (1932) 17 T.C. 325.

of arriving at the balance of profit. The principle in Sharkey v. Wernher¹⁵ cannot depend on there being an earnings basis. If a trader who happened to be assessed on a cash basis gave away stock he would not be outside the principle. The basis of Sharkey v. Wernher¹⁵ is that to bring in nothing produces an unacceptable result because of the unfair difference between the self-supplier and another. Lord Radcliffe's reason,¹⁶ "the trader's choice is itself the receipt," applies equally to the professional man's product because the existence of a trader is not essential to his reasoning. If an author exchanges his book for groceries the value of the groceries must be brought in as a receipt; therefore the existence of cash cannot be the distinguishing feature. Logically the same result should follow at the next stage where there is an appropriation with nothing in exchange. If the appropriation is the equivalent to receiving value, the cash or earnings basis should not be decisive. If an author always gives his books away he is not carrying on a profession; if he has carried on a profession and now gives away a book, there are three questions: has he ceased his profession? If not, is the gift within the course of his profession? If it is not then it is covered by Sharkey v. Wernher.¹⁷

The principle of not taxing what has not been received was exactly what was breached in Sharkey v. Wernher¹⁷ and it begs the question.

Roy Borneman Q.C. and Roderick Watson Q.C. for the taxpayer. It is an accepted general principle of income tax law that a person is assessable to tax only on income or profits which he receives and not on what he might have received: see per Viscount Simonds in Sharkey v. Wernher.¹⁸ This principle can only be displaced by express statutory provision or by compelling precedent, of which Sharkey v. Wernher¹⁹ itself is the only possible example.

Sharkey v. Wernher¹⁹ did not lay down any general rule directing how to arrive at the "full profits" which are assessable. It merely decided how to value one particular item in the accounts if, and only if, it has properly to be brought into the computation of a trader's profits, viz., stock-in-trade. It is not even authority for saying that stock-in-trade must be valued. There is no rule of law that stock-in-trade must be brought in. It is only a rule imported from the ordinary principles of commercial accounting: see per Lord Clyde in Whimster & Co. v. Inland Revenue Commissioners.²⁰

15 [1956] A.C. 58.

16 Ibid. 85.

17 [1956] A.C. 58.

18 Ibid. 68.

19 [1956] A.C. 58.

20 (1925) 12 T.C. 813, 823.

The fair inference from Lord Radcliffe's speech in Sharkey v. Wernher²¹ is that that case was concerned only with the basis of valuation on the assumption that something had to be brought in. The horses were already in the books, some receipt had to be brought in, they could not just disappear. The argument was based entirely on valuation: see the Attorney-General.²²

In any event Sharkey v. Wernher²³ only applies where tax liability is computed on an earnings basis. Where the cash basis applies there is no adjustment to be made for debtors, creditors, work-in-progress and stock-in-trade. Barristers, doctors, authors and painters are normally taxed on a cash basis because valuation of stock-in-trade or work-in-progress would be quite inappropriate. The fundamental difference between the earnings and the cash basis is shown by Inland Revenue Commissioners v. Morrison.²⁴

Once a basis is applied and accepted, it is applied for all purposes. Sharkey v. Wernher²⁵ can only be applied where there are outstandings which have to be valued. Both Lord Reid²⁶ and Lord Keith²⁷ accepted in Carson v. Cheyney's Executor²⁸ that either a cash or an earnings basis could give a fair result, and found nothing heinous in the fact that the results might be different.

On general principle an author does not have any stock-in-trade nor does he have any asset which is susceptible of valuation. He is assessed solely on the fruits of his labour and skill. The Income Tax Acts recognise the difference in the distinction between trades (Case I of Schedule D) and professions (Case II of Schedule D). In calculating profits on a cash basis it is only necessary to strike the balance between actual receipts and actual expenditure.

The expenses of Mr. Innes' Persian trip were covered by earnings other than those from The Doomed Oasis, but they would have been allowable even if the material had never been utilised. Vallambrosa Rubber Co. Ltd. v. Farmer²⁹ shows that the admissibility of the expense is not tested by reference to whether it produces income in the year when the expense is incurred. If when the expense is incurred it is properly incurred for the purposes of the trade it cannot be adjusted afterwards: see per Viscount Simonds in Sharkey v. Wernher.³⁰ In Stainer's Executor v. Purchase³¹ and Carson v. Cheyney's Executor,³² the Crown's

21 [1956] A.C. 58, 76.

22 Ibid. 60.

23 [1956] A.C. 58.

24 17 T.C. 325.

25 [1956] A.C. 58.

26 [1959] A.C. 412, 428.

27 Ibid. 438.

28 [1959] A.C. 412.

29 (1910) 5 T.C. 529.

30 [1956] A.C. 58, 69.

31 [1952] A.C. 280.

32 [1959] A.C. 412.

case rested on the basis that the contracts of an actor and the copyright of an author are income yielding property with a vitality of their own which can be taxed under Case III. That argument was rejected.

Watson Q.C., following. Some figure had to be brought in in Sharkey v. Wernher³³ because the horses were already in the books; that case is only an authority on valuation. The question of principle is whether when as here the account is complete in itself, something should still be brought in.

The extension of Sharkey v. Wernher³³ beyond trades to professions and vocations would mean the liability to tax being decided by reference to the taxpayer's motive in giving his services for under value.

Monroe Q.C. in reply. If the professional man produces something for value in the course of his profession but appropriates it to his own use instead of for value then that appropriation is tantamount to a receipt.

Whether or not there is a profit cannot depend on the form of the accounts. It is said that authors are only assessed on a cash basis, but in Carson v. Cheyney's Executor³⁴ royalties were treated as receipts on the date due. Often debts are treated as paid when due.

If there is a distinction it is between the individual professional man producing through his skill and the trader rather than between a cash and an earnings basis.

It is said that mere writing is not assessable but writing plus turning to account. Here the writing has been turned to account.

LORD DENNING M.R. Mr. Hammond Innes is a writer of distinction who has for many years carried on the profession of an author. He has written many novels and travel books. He has kept his accounts on a cash basis and has submitted these to the revenue for tax purposes. On the one side, he has included his receipts from royalties and so forth. On the other side, he has included the expenses of his travels overseas to gather material; the expenses of his study at home; and a small salary to his wife for her work for him.

In this case we are concerned with one particular novel which he wrote called The Doomed Oasis. It was based on material which he gathered in the Persian Gulf in 1953. He started to

33 [1956] A.C. 58.

34 [1959] A.C. 412.

write it in September, 1958, and worked on it up till 1959. He charged all the expenses in his accounts for those years. In 1960 he was about to publish it. But he felt he would like to do something to support his father, who had retired on modest resources. So Mr. Hammond Innes decided to transfer the copyright in the book The Doomed Oasis to his father as a gift. By an assignment made on April 4, 1960, he assigned to his father, "in consideration of natural love and affection," the copyright, performing rights and all other rights in The Doomed Oasis.

The question arises whether he is liable to tax on the value of those rights in The Doomed Oasis. If he had sold the rights at that time in 1960 their market value would have been £15,425. The Crown say that that sum ought to be brought into his accounts and that he should be taxed on it, although he did not receive a penny for the rights because he had given them away. I may add that Mr. Hammond Innes had also before publication assigned rights in two others of his novels, one to his mother and the other to his mother-in-law. So a like question may arise there.

I start with the elementary principle of income tax law that a man cannot be taxed on profits that he might have, but has not, made: Sharkey v. Wernher.¹ At first sight that elementary principle seems to cover this case. Mr. Hammond Innes did not receive anything from The Doomed Oasis.

But in the case of a trader there is an exception to that principle. I take for simplicity the trade of a grocer. He makes out his accounts on an "earnings basis." He brings in the value of his stock-in-trade at the beginning and end of the year: he brings in his purchases and sales; the debts owed by him and to him; and so arrives at his profit or loss. If such a trader appropriates to himself part of his stock-in-trade, such as tins of beans, and uses them for his own purposes, he must bring them into his accounts at their market value. A trader who supplies himself is accountable for the market value. That is established by Sharkey v. Wernher¹ itself. Now, suppose that such a trader does not supply himself with tins of beans, but gives them away to a friend or relative. Again he has to bring them in at their market value. That was established by Petrotim Securities Ltd. v. Ayres.²

1 [1956] A.C. 58; [1955] 3 W.L.R. 671; [1955] 3 All E.R. 493; 36 T.C. 275, H.L.(E.)

2 [1964] 1 W.L.R. 190; [1964] 1 All E.R. 269; 41 T.C. 389, C.A.

Mr. Monroe, on behalf of the Revenue, contends that that exceqtion is not confined to traders. It extends, he says, to professional men, such as authors, artists, barristers, and many others. These professional men do not keep accounts on an "earnings basis." They keep them on a "cash basis," by which I mean that on one side of the account they enter the actual money they expend and on the other side the actual money they receive. They have no stock-in-trade to bring into the accounts. They do not bring in debts owing by or to them, nor work in progress. They enter only expenses on the one side and receipts on the other. Mr. Monroe contended that liability to tax does not and should not depend on the way in which a man keeps his accounts. There is no difference in principle, he says, between a trader and a professional man. And he stated his proposition quite generally in this way: The Appropriation of an asset, which has been produced in the ordinary course of a trade or profession, to the trader's or professional man's own purposes, amounts to a realisation of that asset or the receipt of its value, and he must bring it into account.

I cannot accept Mr. Monroe's proposition. Suppose an artist paints a picture of his mother and gives it to her. He does not receive a penny for it. Is he to pay tax on the value of it? It is unthinkable. Suppose he paints a picture which he does not like when he has finished it and destroys it. Is he liable to pay tax on the value of it? Clearly not. These instances - and they could be extended endlessly - show that the proposition in Sharkey v. Wernher³ does not apply to professional men. It is confined to the case of traders who keep stock-in-trade and whose accounts are, or should be, kept on an earnings basis, whereas a professional man comes within the general principle that, when nothing is received, there is nothing to be brought into account.

I would only add that the legislature seems to have acted on this footing. Section 471 of the Income Tax Act, 1952, applies where an author has spent more than 12 months in writing a book and sells it for a lump sum. He can "spread" the lump sum over two or three years so that his tax on it does not fall all in one year. That provision only applies to lump sums received by him. If the legislature had thought he was liable for market value of

3 [1956] A.C. 58.

books given away, surely they would have extended the "spread" to those cases also.

Take next Carson v. Cheyney's Executor.⁴ The House of Lords held that when an author dies or discontinues his profession, he is not taxable on moneys received after the date of discontinuance. That was altered by section 32 of the Finance Act, 1960. He becomes chargeable on sums arising from his profession, even though he receives them after he had discontinued it. This provision does not apply when he gives a book away. If the legislature had thought he was chargeable on its value, I should have thought it would have covered that case too.

I hold that Mr. Hammond Innes is not chargeable with tax on gifts which he makes of copyright in his books. I think that Goff J. and the commissioners came to a right decision. I would dismiss this appeal.

DAVIES L.J. I agree. It is not in dispute that there is no specific provision in tax legislation to cover the present case. What is sought by the Revenue in this case is to extend what is said to have been the principle in Sharkey v. Wernher⁵ to what I, like my lord, regard as being an entirely different set of circumstances. I, too, think that it is very remarkable that if the Crown were right in the present case, the result would inevitably follow that there could be no spread-over over a period of two or, as the case may be, three years under the provisions of section 471 of the Act of 1952. If Mr. Innes is assessable on the sum of £15,000-odd (which is the agreed figure for the value of the copyright in this work), then, as I understand it, he would have to pay income tax, and of course surtax, on the whole of that sum on the basis of its having been earned in one year. That strikes one as being a very remarkable state of affairs.

The position of a novelist was adverted to in the speech of Lord Keith of Avonholm in the Cheyney case⁶:

"I turn accordingly to consider what is involved in the professional activities of an author during his life. An author writes books generally for profit or in the hope of profit. It is only when they make a profit that any question of assessing

4 [1959] A.C. 412; [1958] 3 W.L.R. 740; [1958] 3 All E.R. 573; 38 T.C. 240, H.L.

5 [1956] A.C. 58.

6 [1959] A.C. 412, 436.

him on the profits of a profession can arise. It is only by exploiting the work of his brain and his pen that he can make any professional income."

The contention on behalf of the Revenue in this case is that although Mr. Innes has not made, and will not in the present state of affairs ever make, any profit out of the copyright in this work, he must be deemed to have made the profit of £15,000 because he could have made that profit if he had not given the rights away to his father. That seems to me to be an extraordinary extension of anything that was said in Sharkey v. Wernher.⁷

I should refer (and this is the last quotation I shall make) to the words of Lord Radcliffe⁸ in Sharkey v. Wernher, on which great reliance was placed by the Crown. In this passage of his speech Lord Radcliffe was dealing with the difference on the facts of that case between a cost of production valuation and a market valuation, and he said:

"It seems to me better economics to credit the trading owner with the current realisable value of any stock which he has chosen to dispose of without commercial disposal than to credit him with an amount equivalent to the accumulated expenses in respect of that stock. In that sense, the trader's choice is itself the receipt, in that he appropriates value to himself or is doing the direct instead of adopting the alternative method of commercial sale and subsequent appropriation of the proceeds."

I agree with my lord that that principle which was enunciated on the facts of that case, which was really concerned with the method of valuation rather than with anything else, can only be applied to a trader or to a person whose accounts are made up on an earnings basis and who has stock-in-trade which he may other than in a commercial manner transfer to himself or for no consideration to a third party. If the position contended for by the Crown in this case ought to be the law, it seems to me that in the years which have elapsed since 1954, when Sharkey v. Wernher⁹ was decided, provision should have been made to that effect by legislation in the various Acts that have been passed by Parliament.

For those reasons, in addition to what has been said by my lord, I agree that this appeal should be dismissed.

7 [1956] A.C. 58.

8 Ibid. 85.

9 [1956] A.C. 58.

RUSSELL L.J. The Crown accepts that it is a general principle of income tax law that a man is taxed on the basis of what he receives and not on what he might have received. But the Crown says that the principles which led to the decision in Sharkey v. Wernher¹⁰ lead inevitably to a decision in favour of the Crown also in the present case. I cannot accept that. Sharkey v. Wernher¹⁰ was dealing with a disposal of stock-in-trade by a trader whose annual profits were computed on an earnings basis, the stock-in-trade being a necessary part of the computation. The copyright and other rights io the book now in question in no sense formed stock-in-trade of Mr. Innes, and before the assignment to his father they had no part in any computation of profits and gains. For tax purposes his annual profits were computed on a cash basis. It seems to me that the Crown is trying to impose tax, on the one hand, by computation on a cash basis and, on the other hand, by computation on an earnings basis, thus seeking to mix oil and water. But in the end I am entirely unable to see that the decision in Sharkey v. Wernher¹⁰ pushes us to the length suggdsted and I decline to travel that length without being forced to.

Solicitors: Solicitor of Inland Revenue; Field, Roscoe & Co.

10 [1956] A.C. 58.