Fry v Salisbury House Estate Ltd (Salisbury House Estate Ltd v Fry)

Income tax is one tax, collected under distinct Schedules which apply to their respective subjects. Income arising from the ownership and letting of land must be assessed under Schedule A by reference to statutory annual value. The Revenue cannot instead include the rents in trading profits under Schedule D, even where the owner is a company formed to acquire and manage the property or the actual rents exceed the assessed annual value.

A landlord may nevertheless be assessed under Schedule D on profits from services or a distinct enterprise conducted on the premises. Ancillary services do not convert ordinary receipts from unfurnished lettings into trading receipts.

The respondent company owned Salisbury House, comprising about 800 rooms let unfurnished as offices. It provided lifts, cleaning and other services. It was assessed as landlord under Schedule A of the Income Tax Act 1918 by reference to the building's value under the Valuation (Metropolis) Act 1869.

The Revenue also assessed the company under Schedule D. Its calculation included the actual rents as trade receipts, deducted expenses and the Schedule A assessment, and thereby charged the excess of rents over the statutory annual value. The company accepted Schedule D liability for profits from services but disputed the inclusion of its rents.

The Special Commissioners and Rowlatt J upheld the assessments. The Court of Appeal unanimously reversed that decision and remitted the assessments for amendment. The Crown appealed to the House of Lords. The central issue was whether rents received from the office lettings were properly includable as receipts of a trade under Case I of Schedule D.

1. The appeal was dismissed with costs. All five Law Lords concluded that the rents could not be included in the company's Schedule D trading receipts. The indistinguishable appeal concerning the City of London Real Property Company Ltd was also dismissed.

2. Per Viscount Dunedin, Lord Atkin, Lord Tomlin and Lord Macmillan, income tax is one tax and the Schedules provide distinct statutory methods for charging its constituent sources. Schedule A applies imperatively to income represented by property in land. Once that source has been dealt with under its proper Schedule, it cannot be charged again under Schedule D. This followed the conception of one income tax affirmed in London County Council v Attorney-General [1901] AC 26.

3. Per Lord Atkin, Lord Tomlin and Lord Macmillan, the specific Schedules govern their respective subject matter and Schedule D operates residually. The Revenue therefore has no option to choose between Schedule A and Schedule D according to which produces the greater charge. Deducting the Schedule A assessment from a Schedule D computation does not validate the exercise. The statutory measure under Schedule A remains controlling even when actual rents exceed the assessed annual value.

4. Per Lord Warrington of Clyffe, Lord Tomlin and Lord Macmillan, an owner who lets property in the ordinary way does not thereby carry on a trade. The character of the operation, rather than the owner's corporate status or objects, is decisive. The relatively minor services supplied at Salisbury House did not convert the receipt of rents from unfurnished offices into a trading operation. Lord Atkin preferred to rest the result on the exclusive operation of Schedule A, even if the lettings could be described as part of a trade.

5. A property owner may separately be assessed under Schedule D for profits from services or another enterprise conducted on the premises. The distinction is between income derived from exercising property rights, including letting possession to tenants, and receipts from a distinct commercial use while the owner remains in occupation. The Rotunda Hospital decision, [1921] 1 AC 1, illustrated the latter category.

6. The House rejected the reasoning in Rosyth Building and Estates Co v Rogers 1921 SC 372 insofar as it recognised a Revenue option between Schedules A and D. Viscount Dunedin stated directly that it was wrong; Lords Atkin, Tomlin and Macmillan likewise disagreed with its reasoning. An option between cases within one Schedule did not establish an option between different Schedules.

1. House of Lords: Dismissed the Crown's appeal with costs and affirmed the Court of Appeal's decision. The conjoined appeal concerning the City of London Real Property Company Ltd was also dismissed.
2. Court of Appeal: Unanimously reversed Rowlatt J and remitted the case to the Special Commissioners so that the assessments could be amended.
3. High Court: Rowlatt J dismissed the taxpayer's appeal and upheld the Commissioners' decision.
4. Special Commissioners: Confirmed the Schedule D assessments, treating the rents as receipts of the alleged trade after allowing for expenses and the Schedule A assessments.