Commissioners of Inland Revenue v John Lewis Properties plc [2002] EWCA Civ 1869

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF
JUSTICE, CHANCERY DIVISION
(The Hon Mr Justice Lightman)
[2002] EWCA Civ 1869Case No Case No: A3/2001/1543Venue Royal Courts of Justice, Strand,, London, WC2A 2LL
Between
Commissioners of Inland RevenueAppellantJohn Lewis Properties plcRespondent
Before
Lord Justice SchiemannLady Justice ArdenLord Justice DysonLauncelot Henderson QC and Michael Furness QC (instructed by The Solicitors of Inland Revenue) for the AppellantDavid Goldberg QC and Wayne Clark (instructed by Messrs Lovells) for the RespondentDate 20 December 2002

Lady Justice Arden :

The

[1]Inland Revenue appeals against the order dated 13 June 2001 of Lightman J dismissing an appeal by it against the decision of a Special Commissioner (T.H.K Everett) dated 5 September 2000 on the grounds that the sum of £25,556,762.55 (which I will call "the proceeds") received by the respondent, John Lewis Properties plc ("JLP"), as consideration for an assignment of rents constituted a capital, and not an income, receipt. The judge's judgment is now reported at [2002] 1 WLR 35 [2001] STC 1118 . Receipts are chargeable to corporation tax whether they are income or capital, but only if they are capital does the taxpayer have the ability to claim certain reliefs including the ability to roll over any gain into the costs of improving the properties.[2]There is no dispute about the facts. In essence, JLP owns the freehold or a long leasehold interest in five substantial properties ("the properties") which are let to John Lewis plc ("JL") on yearly tenancies. JL is the ultimate group holding company. In 1995 JLP entered into arrangements for factoring some of the rents receivable from the properties. By a deed of assignment dated 20 November 1995 ("the deed of assignment") made between JLP and a Dutch bank, Rabobank, JLP assigned to Rabobank the right to receive rents payable in respect of the five years and one day between 23 January 1996 up to and including 23 January 2001 in return for the proceeds. The proceeds were calculated as the value of the rents due to be received in that period, using a discount rate of about 7.6%. (There is no suggestion that that rate was not negotiated at arm's length). JLP gave notice of the assignment to JL. Rabobank and JLP also entered into a swap arrangement pursuant to which JLP would pay to or receive from Rabobank the amount by which a notional commercial floating rate of interest on an amount equal to the consideration for the assignment exceeded, or was less than, the discount rate of 7.6%. By a further agreement of the same date ("the guarantee and indemnity"), made between JLP, JL and Rabobank, JL gave certain warranties and undertakings to Rabobank in relation to its and JLP's financial position and (among other matters) agreed to indemnify Rabobank against non-payment of the assigned rents. Moreover, under clause 16 of the guarantee and indemnity Rabobank could require the transaction to be unwound if JL failed to pay any of the assigned rents.[3]Following the rental assignment, the bulk of the proceeds were used by the JL group to open new stores and to improve its existing stores. JLP now claims rollover relief in respect of this expenditure. In accordance with Financial Reporting Standard 5 ("FRS5"), Reporting the Substance of Transactions, JLP has prepared its statutory accounts (which are required to show a true and fair view) by accounting for the proceeds as an advance in its accounts and the assigned rents for the period under review as receivables, because the risk of non-payment remains with JLP. However, little argument has been addressed to FRS5 on this appeal. It is not clear to me why that course was taken since the question whether a receipt is capital or income has to be decided from a commercial point of view and in principle the accountancy treatment is, therefore, a relevant consideration.[4]There was no evidence from any officer or employee of JLP as to why the assignment was executed. There was expert evidence from a chartered accountant, Mr Philip Haberman, who analysed the theoretical distinctions between the position of JLP under the transaction and the position of JLP on the basis that no transaction had been carried out. These distinctions included a reduction in the value of the underlying properties, certainty of receipt, certainty as to timing, removal of economic risk, removal of regulatory risk, creation of opportunity and removal of administrative obligations, but it is not suggested that these distinctions were the actual reasons why JLP carried out the transactions. Mr Haberman also produced what he described as practical differences in economic terms. These included a table showing "the opportunity value" to the John Lewis Partnership group of the assignment on a pre-tax basis. He carried out the same exercise on a post-tax basis. Using the group's actual return on capital, he was able to show that the group's return on capital is greater if it received a sum of £25m. in year 1 than if it received the rents due each year. In cross-examination Mr Haberman agreed that the assignment was a financing operation and could be viewed as either a loan or purchase. The Special Commissioner accepted Mr Haberman's evidence ( [2001] STC 1118 at 1124). JLP called a further expert witness, Mr Richard Asher, a Chartered Surveyor. The opinion of Mr Asher was that:- "The value of JLP's reversionary interests in the Properties would be reduced immediately following the Rental Assignment as any purchaser of those interests would have to take subject to the Rental Assignment and would only acquire the right to receive rentals after the five year Rental Assignment period had expired. The value of the Properties should gradually increase again as the period of the Rental Assignment outstanding reduces over time." The Special Commissioner also accepted the evidence of Mr Asher ( [2001] STC 1118 at 1124). However, the amount of the reduction in value which in Mr Asher's opinion would occur was not quantified by him as at any point in time.[5]On this appeal it is common ground that the deed of assignment effected both an assignment of the contractual rights of JLP to receive the rents and the transfer of an interest in land. The judge was required to spend considerable time on that issue although it is of limited significance in relation to the capital/income issue for the reasons given below.[6]The only questions decided by the judge which arise on this appeal are the questions whether the proceeds constituted a capital or income receipt, and if the latter under which head of charge they were chargeable. The judge analysed the capital/income issue in these terms. He held that "the authorities offer as a guide the principle that a receipt for the recurrent produce of an asset, and compensation for the loss of such produce, or to make good a hole in the receipts from such produce, constitute income, whilst a receipt for the asset or part of the asset or for the permanent impairment or the sterilisation of an asset constitutes capital" (judgment, paragraph 18). In so doing the judge drew the hallowed distinction between the fruit of a tree and the tree itself. He further concluded from his survey of the authorities that it was clear that the receipt of a lump sum in consideration of the sale of an income stream, together with the underlying asset producing such income stream, was a capital receipt as was the receipt of a lump sum in consideration of an income stream when there was no underlying asset (for example, an annuity). In his judgment, the question raised by the present case was whether the position was the same where a lump sum was paid in consideration for an income stream but the underlying asset was retained by the vendor.[7]On this, the judge referred to Paget v IRC [1938] 2 KB 25 in which Lord Romer (sitting in the Court of Appeal) held that the proceeds of the sale for a lump sum of an annuity were capital and that this was so even where the subject of the sale was not the annuity for its whole duration but the right to be paid the annuity for a number of years or even for one year (pages 44/45). On this appeal (as before the judge), the Revenue challenges the correctness of Lord Romer's conclusions in this respect.[8]The judge then examined certain Australian cases which in the event he did not find persuasive as they conflicted with what Lord Romer had said in Paget. The judge also examined two recent decisions of the House of Lords, namely IRC v McGuckian [1997] STC 908 also [1997] 1 WLR 1991 and MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd [2001] STC 237 . In the latter case the House of Lords restated the principles established in W T Ramsay Ltd v IRC [1982] AC 300 . I shall have to examine these cases below but critically Lord Hoffmann indicated that a transaction without commercial reality which purported to exchange income for capital failed "to perform the alchemy of transforming the receipt of a dividend from the company into a receipt of a capital sum from someone else." (paragraph 58).[9]Having analysed the speech of Lord Hoffmann (with which the remainder of the House agreed), the judge expressed his conclusions thus:- "37. The guidance afforded by Lord Hoffmann in my view supports the approach of Lord Romer in Paget and reinforces the view that the price received by JLP was capital and not income:(1) JLP was perfectly entitled for the avoidance of tax to structure its commercial transaction with the bank so that in place of an income receipt of rent it received a capital sum. There is no broad 'economic equivalence test' entitling the court to treat a capital item as income because it is the economic equivalent of income;(2) the transaction produced in the hands of JLP, in place of an income stream, an up-front capital sum;(3) the [proceeds were] not merely (as in McGuckian ) the bank's receipt of the rents from the lessees 're-labelled': it was a distinct sum paid out of the resources of the bank under a transaction which had commercial reality;(4) in these circumstances it is not open to the court to recharacterise the [proceeds] as income;(5) the reference by Lord Hoffmann to exchanges of income for capital involving a transfer of risk does not mean that there can be no such exchange for tax purposes in any particular case unless there arises a substantial risk of loss through non-payment which is unsecured or unprovided for. In any event there is in this case a theoretical risk of loss undertaken by the bank if JLPG, JLP and JL went into insolvent liquidation." (judgment, paragraph 37).[10]The judge held that his conclusion was further supported by the premise on which McGuckian was decided, namely that the exchange of an income stream for a lump sum prima facie constituted capital: see the speech of Lord Browne-Wilkinson, [1997] STC 908 at 912. However, the judge recognised that he was not bound by a proposition assumed to be correct by the House of Lords but this reinforced his view.[11]The judge rejected the argument that amendments made by the Finance Act 2000 (to insert into the Income and Corporation Taxes Act 1988 provisions treating the proceeds of certain rent factoring agreements as rent) shed much light on the law in force in 1995. He also rejected the argument that the proceeds of the deed of assignment, if taxable as income, were not within any head of charge.[12]The contention for the Revenue is that the proceeds of the deed of assignment constitute income because they were obtained for the short-term disposal of inherently recurrent produce of income-producing assets which were retained by JLP and because the receipt was calculated to effect from a business and practical point of view not the outright disposal of the properties or any part thereof but rather the conversion of future income into present income. The contention of the taxpayer is that the deed of assignment effected the sale of part of the asset constituted by each property, alternatively part of the value of a capital asset, and accordingly the proceeds represent a capital receipt.[13]The approach which the court must adopt is one of practical and business reality. Thus, Dixon J in Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 , 648 in a passage cited by Lord Nolan when giving the advice of the Privy Council in CIR v Wattie [1999] 1 WLR 873 , held that the answer to the question whether expenditure is of a capital or revenue nature:- "depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured or exhausted in the process."[14]Sir Nicolas Browne-Willkinson VC summed up the approach in a similar way in McClure (Inspector of Taxes) v Petre [1988] STC 749, 754:
"In my judgment it is equally established by authority that to decide whether a particular receipt is in the nature of income or in the nature of capital one has to look at all the circumstances of the particular case and apply judicial common sense in reaching a conclusion as to how a receipt is to be classified."
[15]There is further valuable guidance from the House of Lords in MacNiven. I refer to this below.[16]In the context of capital and income (more precisely, in the context of converting income into capital), the House of Lords has used the word "alchemy", and it has to be observed that this court has not yet found the philosopher's stone, if one exists. One eminent Master of the Rolls, Lord Greene MR, expressed the view "somewhat cynically" (per Lord Upjohn in Strick v Regent Oil below) that "in many cases it is almost true to say that the spin of a coin would decide the [the question whether a receipt was income or capital] almost as satisfactorily as an attempt to find reasons" ( CIR v British Salmson Aero Engines Ltd , (1938) 22 TC 29 at 43). A number of cases have been cited on this appeal on either side of the line. It is difficult at first sight to discern any organising principle save in the "compensation" cases (see below), where compensation is treated as capital or income according to the nature of the sum being replaced, and (perhaps) the case of premiums on leases. However, the decided cases certainly shed light on the qualities of capital and income. I take the more significant of them in turn. In grouping them I am immediately faced by the usual snares of taxonomy. I propose to group the English and Scottish cases cited to us as follows:- i) Cases illustrating the realisation principle: Glenboig Union Fireclay Co Ltd v IRC 1922 SC (HL) 112 , Paget v IRC [1938] 2 KB 25 per Lord Romer, Trustees of Earl Haig v IRC 1939 SC 676, Nethersole v Withers (1948) 28 TC 501, Lowe (Inspector of Taxes) v Ashmore [1971] Ch. 545, McClure (Inspector of Taxes) v Petre [1988] 1 WLR 1386. I use the expression "realisation principle" to denote the principle decided by these cases. "Sterilisation" might have been a better word. ii) Cases on premiums on leases: Strick (Inspector of Taxes) v Regent Oil Co Ltd [1966] AC 295 , CIR v Wattie , above. iii) Compensation cases: the Glenboig case above, J Gliksten & Son Ltd v Green [1929] AC 381, London and Thames Haven Oil Wharves Ltd v Attwool [1967] Ch 772, Raja's Commercial College v Gian Singh & Co Ltd [1977] AC 312 , Deeny v Gooda Walker Ltd [1996] STC 299. iv) Cases on the sale of rights to income: Paget v IRC above, IRC v McGuckian [1977] 1 WLR 991, and see MacNiven (Inspector of Taxes v Westmoreland Investments Ltd [2001] 2 WLR 377 .[17]As can be seen, at least one case falls into more than one group and the grouping, therefore, is not watertight and only serves the purpose of exposition. The realisation principle[18]The Glenboig case is a classic illustration of the realisation principle. The taxpayer company was a merchant of raw fireclay which it extracted from certain fireclay fields which it leased and over which the Caledonian Railway ran. The railway company, no doubt fearful of subsidence, obtained an order preventing it from working these fields and in due course there was a settlement agreement whereby the taxpayer agreed not to work the fireclay fields in return for compensation. The question considered by the House of Lords was whether the compensation, which the railway company paid to the taxpayer as compensation for not being able to work these fireclay fields, constituted a revenue or capital receipt. The compensation represented two and a half years' profits from the fireclay fields, being the period of the remaining working life of the fields. The House of Lords unanimously held that the compensation was a capital receipt. Lord Buckmaster considered it irrelevant that the compensation was calculated by reference to expected trading profit:
"It is unsound to consider the fact that the measure, adopted for the purposes of seeing what the total amount should be, was based on considering what are the profits that would have been earned." (page 463). The important factor was "the quality of the figure arrived at by means of the application" of that measure (page 464). In the words of Lord Wrenbury (at page 465), the compensation "was the price paid for sterilising the asset from which otherwise profit might have been obtained. What is true of the whole must be equally true of part."
[19]Trustees of Earl Haig v IRC , a decision of the Inner House of the Court of Session, is an illustration of the same principle, but the realisation in that case was of the publication rights of Earl Haig's diaries. The realisation was thus only partial, but the publication rights were considered to have been largely exhausted and they represented a large part of the asset (pages 732, 735, 736). As Lord Fleming put it, the transaction was not one which merely involved a use of the subject salva rei substantia (leaving it substantially intact). Again the amount of the receipt was calculated by reference to the amount of profits received from publication. The Revenue on this appeal have adopted the well-worn analogy between a tree and its fruit. It has been used many times before and it was also relied on by Lord Moncrieff in this case:- " the differentiation in any particular case of profits as resulting in capital appreciation on the one hand or on the other in accruer of income may be expected to introduce questions of difficulty. In determining any such question, however, it may perhaps be helpful to distinguish between a fruit-bearing subject and its fruits. The right of usufruct as conferred by the Civil law and so described, or again our own requirement that liferents be enjoyed salva substantia rei , may perhaps be regarded as illustrative. When fruits are ingathered and realised, this in general results in an addition to income; and this will equally be true in the case of natural fruits, industrial fruits or civil fruits. When the subject which provides the fruits is realised on the other hand, this generally results in a transaction on capital account. He must expect a loss, and not a gain, of income, who kills the goose that lays the golden eggs. "[20]In Nethersole's case, a dramatist, Miss Nethersole, who had retired, received payments under an agreement with the author (Rudyard Kipling) of a work ( The Light That Failed ) that she had dramatised. Pursuant to the agreement, the executrix of the author disposed of the film rights (only) in the book and play for ten years in exchange for a lump sum and the payment in issue represented Miss Nethersole's share of the payment the executrix received on that disposal. This agreement operated as a partial realisation of her copyright in the play. The Court of Appeal held that that sum was capital in Miss Nethersole's hands. In the course of his judgment, Lord Greene MR, giving the judgment of the court, rejected the idea that there could be a principle that the disposal for consideration of limited rights in property, so that the property on expiration of the rights came back to the owner intact, should always be treated as resulting in a revenue receipt whereas if the value of the property was permanently diminished by the disposal, there was clearly a disposal of capital (pages 510/511). He referred to the payment of a lump sum in consideration of the grant of a patent licence (in addition to royalties) in CIR v British Salmson Aero Engines Ltd , where such a payment was held (by a court also including Lord Greene MR) to be capital. He held, however, that "If the lump sum is arrived at by reference to some anticipated quantum of user it will, we think, normally be income in the hands of the recipient. If it is not, and if there is nothing else in the case which points to an income character, it must, in our opinion, be regarded as capital." (page 512). In Nethersole's case the lump sum was not related to any royalty calculation. The court concluded that the lump sum was a capital receipt. Moreover, "Miss Nethersole was being paid for, among other things, the right to cut her play to pieces and combine the story with other stories, a right which, whether it should be exercised or not, amounted to a right to diminish the value of the copyright in the play." (page 513).[21]The Crown appealed to the House of Lords, who affirmed the decision of the Court of Appeal. Lord Simon said: "Here we have the sale and transfer outright of an item of property which previously belonged to the respondent, not the licence to use it granted by its unchanged owner, and this does not give rise to annual profits or gains unless the sale takes place in the course of carrying on a trade or profession." (page 518).

Lord Uthwatt observed: "The relevant fact is that the owner of an asset, entitled by law to divide it into two distinct assets, has done so by selling one of those assets for an agreed consideration payable in a lump sum. A sale, not in the course of trade, of an asset does not attract tax on the consideration." (page 520). It is to be noted that Nethersole's case concerned the sale of part of the copyright to a dramatic work, not the sale of royalties earned under a licence to use the copyright work.

[23]In McClure v Petre , an owner of land received a lump sum for a licence to deposit topsoil on his land up to the maximum permitted by law. There could never be a recurrence of such a payment. There was a once and for all disposal of a valuable right or advantage and the receipt was therefore capital.[24]The observations of Lord Romer in Paget v IRC also fall within this group. Miss Paget held bearer bonds of the City of Budapest (payable in London) and the kingdom of Yugoslavia (payable in New York) with interest coupons attached. The issuers of the bonds were in default and substitutionary payments were proposed. Miss Paget sold the interest coupons, which were evidently detachable bearer obligations, in London. The case is an example of the realisation principle because Miss Paget disposed of all her rights in the interest coupons which she sold. The question was whether Miss Paget was liable to income tax on the sale proceeds under either Schedule C or Case IV of Schedule D. Schedule C was inapplicable and Schedule D applied only if the sale proceeds were "income arising from securities out of the United Kingdom". The part of the decision relevant to this appeal is the part rejecting the contention that the sale proceeds fell to be taxed under Case IV of Schedule D. Sir Wilfrid Greene MR said this:- "[This] contention can be disposed of quite shortly. The purchase price received by Miss Paget was not income arising from the bonds at all. It arose from contracts of sale and purchase whereby Miss Paget sold whatever right she had to receive such income in the future as well as her right to take what was offered by the defaulting debtors. It is, in my opinion, quite impossible to treat this as equivalent in any sense to 'income arising from' the bonds." (page 35).[25]The second member of the court, Lord Romer, said this:- "In these circumstances, the only question to be decided is whether the proceeds of sale of a right to receive income in the future can be treated as income for the purpose of the Income Tax Acts. The question thus broadly stated plainly admits of but one answer; and that answer must be in the negative. The proceeds of the sale for a lump sum of an annuity, for instance, are capital in the hands of the vendor and not income. And this is true even when the subject of the sale is not the annuity for its whole duration but the right to be paid the annuity for a number of years or even for one year." (pages 44 – 45).[26]To MacKinnon LJ the issue was clear: the issuer had paid no interest and the sale proceeds could not be "income from securities". (page 48).[27]All three members of the court therefore rejected the argument that Miss Paget's sale proceeds constituted income within Schedule D. No cases are cited on the capital/income distinction. While Lord Romer clearly held that the Revenue's claim had to be rejected because the sale proceeds were capital, the ratio of the majority was that the receipt did not derive from the bonds in any event. The actual result in Paget was reversed by statute (see now section 730 of the Taxes Act 1988, referred to in paragraph 39 below).[28]I thus reject the submission of Mr David Goldberg QC, for the respondent, that this court is bound by what Lord Romer said and that Paget concludes this case in the taxpayer's favour. Lord Romer's observations must, however, be given great respect, especially as they have stood unchallenged for nearly 75 years. I have concluded, however, that, read generally as supporting the taxpayer's contention that the sale of the right to receive income produces capital, Lord Romer's observations cannot stand with later cases, for example, in Nethersole v Withers . These cases make it clear that there is no inflexible rule that the sale of an asset, or part of an asset, for a lump sum will always be treated as resulting in a capital receipt: it will however be capital if there is a disposal of the asset, or part of the asset, which produces income. This is so even if the asset itself only has a limited life. I further accept the submission of Mr Launcelot Henderson QC, for the appellant, that an inflexible rule that the sale of an asset always produces a capital receipt would be inconsistent with the required approach of examining all the circumstances from a practical and business point of view. On the other hand, in the context of the case, there is a similarity in point of fact between the sale of a detachable interest coupon and an annuity. As the High Court of Australia (see below) has pointed out, they are both sales of the right to receive a payment of income for which there is no underlying asset. (There would moreover be likely to be a separate coupon for each interest payment due over the life of the bonds in the Paget case). I accept that the sale of a single year's payment of an annuity might fall within the realisation principle even though it is only a partial realisation of the asset since that part of the asset is then disposed of. On the other hand, it would not always do so. In the case where the annuitant is entitled to (say) six monthly payments of annuity I do not consider that he could necessarily avoid income tax by selling his right to a six months' instalment for a lump sum to a third party. I thus distinguish between an annuity (or part of an annuity) and instalments of annuity. I also distinguish between an interest coupon and payments of interest thereon. The annuity and the interest coupon are assets from which income is derived and are entire in themselves. Lord Romer's observations are consistent with the realisation principle when that distinction is kept in mind. Turning to this case, I consider that the right to receive rent is analogous to a payment or instalment of an annuity rather than to a part of the annuity itself. The right to receive rent is a payment for the user of property and is thus dependent on the performance by the landlord or lessor of the covenants contained in the tenancy or lease. The right to receive rent is thus not analogous to an annuity, which is entire in itself. The chose in action is not in reality the asset from which profit in the form of rent is earned. In a practical sense, such a chose in action is simply income – the fruit of the tree or (per Lord Moncrieff) the golden eggs rather than the goose itself. It can likewise be said that the right to receive distributions made by a company is not in reality the asset from which profit in the form of distributions is earned. Distributions are paid out of profits earned on the assets representing a company's share capital and reserves: all these represent the tree while distributions declared (and the assets earmarked to pay them) and the right to receive future distributions represent the fruit. IRC v McGuckian (considered below) is not, however, authority for the proposition that the right to future distributions, if assigned, gives rise to a capital receipt because that proposition was there conceded, and was not the subject of decision by the House of Lords.[29]In Lowe v Ashmore, the issue was whether the abstraction of turves by a farmer and the receipt by him of proceeds of sale resulted in a capital or income profit. There was no evidence as to how long it was before there could be turves again on the land fit for sale. However, Megarry J inferred that by proper cultivation of the land it would be possible to produce turves again, at any rate after some period. Accordingly, Megarry J held that the land remained capable of producing again the products which had been sold and that accordingly the receipts were income. This case, therefore focuses on the element of "recurrence" in the asset and, since the rents payable in respect of the properties have the same quality, Mr Goldberg has argued persuasively that this case can be distinguished. Mr Goldberg submits that in reaching this conclusion the court had been influenced by the fact that the taxpayer was trading as a farmer. In my judgment, this is not correct, as Megarry J was dealing with the question of whether the profits were "annual profits" within section 122 of the Income Tax Act 1952. It was only when he reached his conclusion on that point that he went on to consider whether the profits arose from a trade. The "recurrence capability", that is the ability of the asset to produce more assets of the type transferred, has been held to be a relevant test of income. One only needs to recall the analogy of the fruit and the tree to realise that, as a matter of common sense, recurrence must be a sign of income.[30]In passing Mr Henderson draws the court's attention to the fact that in McClure , Sir Nicolas Browne-Wilkinson VC said that the proposition to be derived from Lowe v Ashmore "is obviously limited to the case where there has been no disposal of the land or any interest in it" (page 1392A). He submits that Megarry J clearly contemplated that the right to take turf in Lowe v Ashmore could properly be classified as a profit à prendre in gross although he did not decide the point (557F – 558A). Be that as it may, in the present context it is of little moment whether JLP technically disposed of an interest in land by the assignment because the character of the receipt as income or capital does not depend on its juristic classification.[31]Accordingly, all the cases in this group, other than Paget v IRC and Lowe v Ashmore concern the sale of the whole or part of an asset from which profits may be earned. I have explained that, in my view, the right to receive rents is not an asset of this kind. I would also observe that it was also apparently not relevant in Lowe v Ashmore to enquire whether the value of the farm had in fact been diminished by the sale of turves (which was held to result in the receipt of income). Paget v IRC was decided on a different basis but the observations of Lord Romer and the basis on which he decided the Paget case are consistent with my analysis. Premiums on leases[32]A premium payable by a tenant on taking a lease has been treated in law as a sum paid in order to obtain a capital asset in the form of a new lease, and thus as constituting a capital payment by the tenant. This is so even if the amount of the premium has been calculated by reference to the prospective rent. In Strick (Inspector of Taxes) v Regent Oil Co Ltd , premiums were payable on leases at nominal rents from five to twenty-one years in duration granted by a petrol retailer in favour of a petrol supplier, who paid the premiums. The supplier then granted subleases of the premises back to the retailer with restrictive covenants, or a "tie", in favour of the supplier. Lord Reid observed that premiums paid for leases had always been regarded as capital. However, he left open the position where a premium had been paid for a very short lease, say two or three years. Apart from Lord Reid, the members of the House gave comparatively little consideration to the possibility that on a special set of facts a premium for a lease might actually constitute income. Lord Morris considered that a tie for five or even fewer years was a capital asset but Lord Upjohn and Lord Pearce both thought that periods of more than five years were necessary in the case of mere contractual ties. The House of Lords held that the premiums constituted capital payments by the petrol supplier. The essential point, common to both premiums and ties, was that, for the payments to be treated as capital, an asset or advantage of a capital nature would have to be created.[33]In CIR v Wattie , the question was whether a reverse premium was capital or income in the hands of the lessee who received it. It was held to be the former on the basis that it was a once and for all payment for taking on an onerous lease for a substantial period. I should mention an additional submission which Mr Goldberg made on the basis of this case, namely that, if in all the circumstances a receipt could not be attributed to the profits of a particular year, then in the absence of special statutory provisions, it had to be left out of account (see the speech of Lord Nolan, giving the advice of the Privy Council, at page 882). However, Mr Henderson submitted, in my judgment correctly, that if in this case the proceeds are income, they are properly attributable to the year of receipt.[34]Mr Goldberg has argued that JLP could certainly have ensured that the proceeds were a capital receipt if it had granted a five year lease to Rabobank at a nominal rent and with a premium equal to the amount of the proceeds. That submission seems to me, with respect, not to take the matter much further since the transaction with which we are concerned is a very different one. To treat the proceeds in the present case as if they were a premium paid on the grant of the lease would in my judgment be to do the very thing that both counsel are agreed the court cannot do, that is recharacterise the transaction as something other than that effected by the assignment[35]Where a premium is paid, a capital asset is created, viz a lease. Such an event is to be distinguished from the payment of a lump sum representing the accumulation of payments for which a tenant is already liable (even if not immediately) in return for day to day use of demised premises. This is a distinction made by Lord Wilberforce in Strick v Regent Oil at page 349. Speaking of the premiums in issue in that case, Lord Wilberforce said:- "They were lump sums, paid at the start of the transactions to procure the immediate emergence of an asset or advantage, enjoyment of which was secured for a period. They were not, and did not represent the aggregation of, current payments made for the day-to-day use of or continuation of an advantage."[36]For myself, I have found the cases on premiums to have been of limited assistance on this appeal. The treatment of premiums for fiscal purposes is now subject to specific statutory provision: see section 34 of the Taxes Act 1988 referred to below. Moreover, the payment of a premium must be distinguished from an advance payment of rent, which gives rise to an income receipt in the hands of the lessor ( Greyhound Racing Association (Liverpool) Ltd v Cooper (1936) 20 TC 373). The lessor who receives a premium is able to say that he has realised an element of the capital value of his property by granting a new lease. The difference between that and the present case is that JLP has not, in my judgment, in reality realised an element of the capital value of its property but has disposed of some of the income which it produces or will produce in future. Thus the present case is not on all fours with the cases on premiums. Moreover, examination of the cases serves to illustrate and emphasise the importance of analysing the source, as a practical business matter, of the payment in issue. In Strick , the source was the transaction of the grant of a lease. In the present case the source is the assignment. This involves the disposal of choses in action but that is a juristic classification, not a classification from a commercial or business point of view, and juristic distinctions carry little weight in this field.[37]I would regard as a capital asset an asset or advantage which is held for the enduring benefit of the taxpayer's business, here property investment. I take this meaning of capital asset from the celebrated test of capital expenditure set out by Viscount Cave LC in British Insulated and Helsby Cables v Atherton [1926] AC 205 , 213-214:
"But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of the trade, I think there is very good reason for treating such an expenditure as properly attributable not to revenue but to capital."
(emphasis added). Compensation cases[38]It will be recalled that in the Glenboig case the taxpayer received compensation for inability to continue working its fireclay fields. This was held to be a capital sum. The principle that has been applied is that if the compensation was for loss of income, the receipt is treated as income and likewise if the compensation was for loss of a capital asset (as in Glenboig ), the receipt is treated as a capital receipt: see per Diplock LJ in London and Thames Haven Oil Wharves Ltd v Attwooll [1967] Ch. 772 at 815. Thus, for example, in Deeny v Gooda Walker Ltd, damages awarded to Lloyd's names against their managing agents for the negligent conduct of the names' underwriting affairs for several years of account were held to be taxable as income, since the damages replaced the losses which the names in fact made. So, too, where a timber merchant lost his stock in trade of timber through fire, the insurance monies were income:- "The whole point is that the business of the company is to buy timber and to sell timber and when they sell timber they turn it into money. This particular timber was turned into money, not because it was sold, but because it was burned and they had an insurance policy over it. The whole question comes to be whether it is turnover in the ordinary course of their business. I think that it was. They had that amount of timber, which they got rid of and for which they got a certain price, and then they could begin again." (per Viscount Dunedin in J Gliksten and Son, Ltd v Green [1929] AC 381, 385).[39]In Raja's Commercial College v Gian Singh & Co Ltd [1977] AC 312 , the Privy Council (Lord Diplock, Lord Simon of Glaisdale, Lord Fraser) held that the principle summarised above from the Attwooll case applied equally to traders and investors. The tax treatment of compensation did not depend on whether the recipient was a trader rather than an investor, but on the "essential character" of the compensation. "The essential character" of the compensation directs one back to examine the matter for which the compensation is being paid.[40]The compensation cases are all part of a piece with the other cases that I have cited. The theme in all these cases is that the nature of the asset, from which the payment in issue is derived, has a strong influence on the characterisation of that payment as income or capital. Sale of rights to income[41]I have already dealt with Paget v IRC in which Miss Paget sold interest coupons and was held not to have received income arising from securities. The interest coupons must have been detachable from the bonds and thus constitute the entirety of Miss Paget's property in the interest coupons. In IRC v McGuckian , the question in issue was in essence whether a shareholder, Shurltrust, by assigning the right to any dividends paid in 1979 by a company called Ballinamore to another company called Mallardchoice for a lump sum had disposed of a right to income and received capital in circumstances where Mallardchoice immediately paid 99% of the dividend it received back to Shurltrust. The case was decided on Ramsay principles and the capital/income distinction was not argued. Accordingly McGuckian is not authority for the proposition that the sale of the right to receive income indicates that the proceeds constitute a capital receipt. Even so, Lord Browne-Wilkinson expressly proceeded on the basis that that was the prima facie position, and, as Mr Goldberg observes, the issue in that case would not have arisen as it did if it had not been conceded that this sale of the right to future dividend produced a capital sum. This he submits supports his argument that sale of the right to income results in a capital receipt. However, it is not clear why the Revenue took that view in McGuckian. The share capital of Ballinamore was £500 and the dividend was nearly £500,000, being the totality of its distributable reserves (no mention being made of any undistributable reserves). Factually, therefore, the dividend in issue in McGuckian was quite different from the recurring rents which JLP disposed of in this case. In any event, Lord Steyn made it clear in McGuckian that he would not have regarded the money in question as capital in any event (see page 1002 C-D) and Lord Cooke did not regard it as axiomatic that the proceeds of sale of a right to receive a dividend would be capital, although he expressed the view that in many cases this would be so. (page 1003D).[42]In MacNiven, Lord Hoffmann (with whom the other members of the House agreed) set out the approach to the interpretation of tax statutes. He drew an analogy with the distinction between income and capital where it is well established, as shown above, that those terms have a commercial meaning and whether particular receipts constitute income or capital is to be ascertained from a practical and business point of view. His speech also gives important guidance as to how to apply a term which has a commercial meaning. He said:- "[39.] My Lords, I venture to suggest that some of the difficulty which may have been felt in reconciling the Ramsay case with the Duke of Westminster's case arises out of an ambiguity in Lord Tomlin's statement that the courts cannot ignore 'the legal position' and have regard to 'the substance of the matter'. If 'the legal position' is that the tax is imposed by reference to a legally defined concept, such as stamp duty payable on a document which constitutes a conveyance on sale, the court cannot tax a transaction which uses no such document on the ground that it achieves the same economic effect. On the other hand, if the legal position is that tax is imposed by reference to a commercial concept, then to have regard to the business 'substance' of the matter is not to ignore the legal position but to give effect to it [50.] The distinction between commercial and legal concepts has also been drawn in other areas of legislation. So, for example, the term 'financial assistance' in section 151 of the Companies Act 1985 has been construed as a commercial concept, involving an inquiry into the commercial realities of the transaction: see Burton v Palmer [1980] 2 NSWLR 878, 889-890; Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1. But the same is not necessarily true of other terms used in the same section, such as 'indemnity'. As Aldous LJ said in British & Commonwealth Holdings plc v Barclays Bank plc I [1996] 1 WLR 1, 14:
'It was submitted that as the words 'financial assistance' had no technical meaning and their frame of reference was the language of ordinary commerce, the word 'indemnity' should be similarly construed. The fallacy in that submission is clear. The words 'financial assistance' are not words which have any recognised legal significance whereas the word 'indemnity' does. It is used in the section as one of a number of words having a recognised legal meaning.'
I would only add by way of caution that although a word may have a 'recognised legal meaning', the legislative context may show that it is in fact being used to refer to a broader commercial concept. [51] In IRC v McGuckian [1997] STC 908 , [1997] NI 157 a Republic of Ireland company called Ballinamore had substantial distributable reserves. The shareholders, Mr and Mrs McGuickan, wanted to receive this money but not to pay income tax on the dividend. So they entered into a scheme by which they first transferred their shares to an offshore trustee called Shurltrust. By a series of preplanned transactions, it then assigned the right to receive the dividend to a United Kingdom company called Mallardchoice in consideration of the payment of a sum equal to 99% of the expected dividend. Ballinamore then declared the dividend and paid it to Mallardchoice, which immediately paid 99% to Shurltrust. [52.] The statutory question was whether Shurltrust had received income or capital. If it was income, the effect of various tax avoidance provisions concerning the transfer of assets abroad was that the payment would be deemed to be income of the McGuckians. If it was capital, the McGuckians would not be liable for tax. The McGuckians said that if Shurltrust had simply received the dividend, it would of course have been income. But Shurltrust did not receive the dividend. It received a payment from Mallardchoice which was a capital payment for an assignment of its right to income. [53.] The Inland Revenue's argument, relying upon the formulation in the Furniss case [1984] AC 474 was that the assignment should be disregarded. The Northern Ireland Court of Appeal said (not, if I may respectfully say so, without justification) that one could not simply 'disregard' the assignment. The payment of the money by Mallardchoice to Shurltrust was the consideration for the assignment and an integral part of that transaction. If the assignment had to be disregarded, one could not explain how Shurltrust had received any money at all. [54.] In IRC v McGuckian [the question] was the nature of the payment received by Shurltrust – capital or income? The question was not whether the assignment should be disregarded but whether, from a commercial point of view, it amounted to an exchange of income for capital. Such exchanges usually have a commercial reality: the purchase or sale of an annuity, for example, is an exchange of capital for an income stream, involving a transfer of risk. But the transaction in IRC v McGuckian was nothing more than an attempt to relabel a sum of money. The fact that the assignment had no commercial purpose did not mean that it had to be disregarded. But it failed to perform the alchemy of transforming the receipt of a dividend from the company into the receipt of a capital sum from someone else. For the purpose of the fiscal concept at stake, namely the character of the receipt as income derived from the company, it made no difference. [58.] The limitations of the Ramsay principle therefore arise out of the paramount necessity of giving effect to the statutory language. One cannot elide the first and fundamental step in the process of construction, namely to identify the concept to which the statute refers. I readily accept that many expressions used in tax legislation (and not only in tax legislation) can be construed as referring to commercial concepts and that the courts are today readier to give them such a construction than they were before the Ramsay case. But that is not always the case. Taxing statutes often refer to purely legal concepts. They use expressions of which a commercial man, asked what they meant, would say 'You had better ask a lawyer'. For example, stamp duty is payable upon a 'conveyance or transfer on sale': see Schedule 13, paragraph 1(1) to the Finance Act 1999. Although slightly expanded by a definition in paragraph 1(2), the statutory language defines the document subject to duty essentially by reference to external legal concepts such as 'conveyance' and 'sale'. [59.] Even if a statutory expression refers to a business or economic concept, one cannot disregard a transaction which comes within the statutory language, construed in the correct commercial sense, simply on the ground that it was entered into solely for tax reasons. Business concepts have their boundaries no less than legal ones [60.] Likewise the use of business concepts like "income" and "capital" may give the taxpayer a choice of structuring a commercial transaction so as to come within one concept or the other. As Lord Greene MR said in a celebrated passage in IRC v Wesleyan and General Assurance Society (1946) 30 TC 11 at 16:
"In dealing with Income Tax questions it frequently happens that there are two methods at least of achieving a particular financial result. If one of those methods is adopted, tax will be payable. If the other method is adopted, tax will not be payable. It is sufficient to refer to the quite common case where property is sold for a lump sum payable by instalments. If a piece of property is sold for £1,000 and the purchase price is to be paid in ten instalments of £100 each, no tax is payable. If, on the other hand, the property is sold in consideration of an annuity of £100 a year for ten years, tax is payable. The net result from the financial point of view is precisely the same in each case, but one method of achieving it attracts tax and the other method does not." [61.] It follows that a transaction which, for the avoidance of tax, has been structured to produce, say, capital, and does produce capital in the ordinary commercial sense of that concept (unlike the payment in IRC v McGuckian) cannot be "recharacterised" as producing income (see Comr of Inland Revenue v Wattie [1998] STC 1160, [1999] 1 WLR 873 )."
[43]Lord Hoffmann's use of the term "commercial reality" in MacNiven is reminiscent of his approach to the expression "financial assistance" in (what was then) section 54 of the Companies Act 1948: "The words have no technical meaning and their frame of reference is in my judgment the language of ordinary commerce. One must examine the commercial realities of the transaction " ( Charterhouse Investment Trust v Tempest Diesels Ltd [1986] BCLI 1, 10 (per Hoffmann J) (case cited by Lord Hoffmann in MacNiven at paragraph 50).[44]However, in MacNiven , Lord Hoffmann was only dealing with the capital/income question by analogy and he did not seek to examine the authorities on that question. The test of commercial reality does not represent a completely new approach to that distinction, but constitutes the most recent and authoritative guidance on the capital/income question. Income and capital are commercial concepts. To give effect to them, the court must have regard to the "'business' substance of the matter" (see per Lord Hoffmann at paragraphs 40, 50, 54, 58 of his speech in MacNiven ). Points arising from the English and Scottish cases[45]Certain points can be derived from all these cases. The first point is that every case depends on careful examination of the particular circumstances. The decision whether a receipt (or item of expenditure) is capital or income is highly fact-sensitive. Second, 'capital' and 'income' are commercial concepts. The test is one of commercial reality and technical juristic distinctions are of little relevance. The court must pay regard to the transactions which took place, but it matters little that (in this case) the assignment effected the transfer of an interest in land or the disposal of chose in action, whether at law or in equity. Third, the underlying asset from which the sum is derived may have a large influence on whether the payment is capital or income. The compensation cases also show that the interposition of a third party (normally an insurer or tortfeasor) does not alter the importance of the source of the payment in issue in this sense. Fourth, the court asks whether as a matter of practical and business reality the asset transferred was (so to speak) the fruit or the tree on which the fruit hung. Accordingly, a distinction is drawn between fruit and the fruit-producing element of an asset. Fifth, the sale of part of the asset does not always result in a capital receipt: see for example, Nethersole v Withers and Lowe v Ashmore . Sixth, the court also examines carefully the nature of the payment. But one must be wary of relying solely on the nature of the payment. The mere fact that it is a lump sum does not mean that it is capital. For example, a person may write an article for the local newspaper and transfer to it the copyright to it and receive in exchange a lump sum and yet be held to have received income. On the other hand, a capital asset may be realised by instalments: see IRC v Wesleyan and General Assurance Society per Lord Greene MR cited by Lord Hoffmann in McGuckian , above. Recurrence is relevant in that it generally signifies income but, as in the example just given about writing an article for a newspaper, income need not be recurrent. The mere fact that a receipt is a sum calculated by reference to trading profits does not mean that it is income, though it will often be. None of the factors identified in this paragraph is decisive, but they may indicate that a particular outcome is to be preferred. The Australian cases[46]We were shown two Australian decisions, Commissioner of Taxation v The Myer Emporium Ltd , a decision of the High Court of Australia (Mason ACJ, Wilson, Brennan, Deane and Dawson JJ), and Henry Jones (IXL) Ltd v Federal Commissioner of Taxation (1991) 102 ALR 1, a decision of the Federal Court of Australia on appeal from Sweeney J. In the former case, the issue was whether the sale of future interest payable on a loan for more than seven years in exchange for a lump sum constituted income or capital. The High Court distinguished Paget and held that:- "If the lender sells his mere right to interest for a lump sum, the lump sum is received in exchange for, and ordinarily as the present value of, the future interest which he would have received. This is a revenue not a capital item – the taxpayer simply converts future income into present income: see Commissioner of Internal Revenue v P.G. Lake Inc. In Paget the coupons had come to represent, like a contract to pay an annuity, the sole source of the expected payments. Lord Romer drew that analogy, treating the sale for a lump sum of an annuity as an instance of a sale of a right to receive income in the future, the proceeds of which are not treated as income. Unlike the sale of the coupons in Paget, the sale of a right to interest severed from the debt is not a sale of a tree of which the future payments are the fruit. The present case may thus be distinguished from the view of the facts which was the foundation of the decision in Paget. If Paget is not to be distinguished in this way, we should be unable to accept its authority for the purposes of the Act." (page 218 – 219).[47]I do not think it is necessary to set out the decision in the Henry Jones (IXL) case as (so far as material) it applied the same principle.[48]These cases are persuasive authority only, but they are consistent with the conclusions reached above. I do not agree with the judge that the conclusions of the High Court are "in total conflict" with the observations of Lord Romer, given that Lord Romer was dealing with detachable coupons. The High Court of Australia recognised that the coupons were "the sole source of the possibility of making some payment abroad; they were the sole source of the expectation" of the payments offered in lieu by the issuers on their default. (page 219).[49]The analysis of the High Court of Australia is of benefit because it has already had to consider the question with which we are concerned. Dame Sîan Elias, Chief Justice of New Zealand, speaking extra-judicially said recently that the advantage of the common law is the provision of reasons for judgments. Lord Rodger of Earlsferry, also speaking recently extra-judicially, has made the same point but emphasised that such reasons are given in the particular context of the jurisdiction in question. However, subject to that qualification, reasons given by other courts can cut across international boundaries and enable us to derive valuable assistance from other parts of the common law world. That said, the High Court of Australia's conclusion was in reference to the facts of the case before it and could not be taken for the purposes of English law, even on the assumption that English law is the same, to have established an immutable principle. Statutory provisions[50]Mr Goldberg submits that other fiscal legislation, namely sections 34, 56, 56A and 730 of the Income and Corporation Taxes Act 1988 (as amended), proceeds on the assumption that the price paid for what is in effect the sale of the right to an income is capital and not income. Mr Goldberg also relies on the form of the amendments made by section 110 of the Finance Act 2000.[51]Section 34 provides that a proportion of a premium payable under a lease, calculated by applying an algebraic formula, will be treated as rent. As this deals with premium I do not accept the premise of Mr Goldberg's submission that this is the sale of a right to income. Section 56 provides that the disposal of the right to interest arising under certificates of deposit or similar transactions will be treated, if it would not otherwise be treated , as annual profits. Section 56A extends section 56 to the disposal of the right to receive an amount pursuant to a deposit under a transaction where there is no certificate of deposit but only the right to call for such a certificate. The words italicised make it clear that Parliament did not proceed on the basis that such sales would necessarily be capital. Section 730 provides that if there is a disposal of the right to interest payable in respect of a security without disposal of the security itself, that interest is deemed to be income of the owner of the security. This section seems to me to be dealing with the attribution of income rather than the income/capital question.[52]The effect of sections 43A, 43B and 43C of the Finance Act 1988 as inserted by section 110 of the Finance Act 2000 is that if the deed of assignment were now executed the proceeds would be treated as income. The new provisions apply, however, only to short-term transactions and Mr Goldberg submits that the implication is that a disposal of the right to receive income would otherwise be capital. The judge agreed with this inference and took "some comfort" from these provisions but concluded that they could not shed much light on the law in force five years previously (judgment, paragraphs 41, 42). In my judgment, it would be unsound on this appeal to draw any inference about the application of the capital/income question to transactions outside sections 43A to 43C. Section 43A is structured in such a way that it makes critical the question whether under normal accounting practice the assignor of rents would have to account for the proceeds received under the assignment as a financial liability (in this case, as a loan). Little argument has been addressed in this court on the relevance of FRS5 on the capital/income question in the absence of section 110. Given that the court is required to examine the transaction from a practical and business point of view, the accounting treatment is one of the relevant circumstances and may provide some assistance to the court (see per Lord Wilberforce in Strick v Regent Oil above, at 355). Moreover, section 43A only applies to assignments of rent for terms not exceeding fifteen years and there could have been separate policy reasons for limiting the new provisions in this way. However that may be, the fact that the legislature proceeded on a particular basis as to the general law cannot in any event preclude the court from declaring what the general law was: see Birmingham Corporation v West Midland Baptist (Trust) Association (Inc) [1970] AC 874 at 898 per Lord Reid. The judge's analysis[53]In his conclusion, the judge identified five reasons for holding that the receipt of the proceeds of the deed of assignment was capital not income (see paragraph [8] above). His first reason was that of taxpayer choice. However, there is no question as to that in this case and there is no suggestion that the transaction should be taxed as income simply because it could have been effected in a manner that clearly produced income. I agree, but as Lord Hoffmann said in MacNiven (paragraph 39), where a commercial concept is used, to have regard to the 'business' substance is not to ignore the legal position but to give effect to it. The judge's second reason was that the transaction produced a lump sum (he called it a "capital" sum but that of course was a matter of conclusion) in place of an income stream. However, this is only an indicator and cannot be conclusive in itself: this follows from my analysis of Lord Romer's observations in Paget v IRC and other cases, above, for example the Nethersole case and Greyhound Racing Association case. The judge's third reason was that this was not a transaction under which rents were "relabelled". The proceeds under the deed of assignment were a distinct sum paid out of the resources of Rabobank under a transaction which had commercial reality. I accept that Rabobank paid the proceeds out of its own resources. However, the whole transaction must be reviewed to see whether as a matter of commercial reality it produced income rather than capital. In MacNiven the abortive attempt in McGuckian to turn income into capital was said to have been nothing more than an attempt at relabelling. The judge concluded (as his fourth reason) that in those circumstances it was not open to the court to recharacterise the proceeds as income. It is not suggested by the Revenue that the proceeds should be recharacterised. Recharacterisation would involve disregarding the assignment. Nor does economic equivalence play any part in this case: that would involve applying some broad functional test to establish the nature of the proceeds. As his fifth reason, the judge held that there could be an exchange of income for capital even though there was no substantial risk of loss through non-payment and in any event in this case there was the theoretical risk of loss if the John Lewis Group went into insolvent liquidation. The question whether there has been a real transfer of risk is relevant because the court is examining the transaction from the business point of view. Transfers of theoretical risk, however, are likely to be of less impact in that context. Conclusions[54]In my judgment, there are a number of other features of the transaction which must be addressed apart from those enumerated by the judge in his conclusion. First, JLP's profits were higher as a result of the assignment than they would have been if the rents had been received in the usual way. This factor provides a real commercial motive for the transaction. However, I do not consider that this alone can resolve the income/capital question. Commercial motive and commercial reality are different concepts. The one can exist without the other. Second, JLP made the proceeds available for application by the group in expenditure on capital improvements but the evidence does not in my judgment show that the sale proceeds performed any different function in its economy from that which the rents would have performed if they had been discounted by Rabobank. JLP continued to show the rents as rents receivable in its published accounts. Third, so far as the banking transaction with Rabobank was concerned, it is not possible just to look at the transaction as between Rabobank and JLP. The transaction was highly unusual because the tenant was a party to the transaction and gave a guarantee, and as a result the only risk transferred was a theoretical one. If there was default in the payment of any of the assigned rents, Rabobank could recover the relevant part of the proceeds either from JLP or from JL under the guarantee and indemnity. Fourth, the proceeds were substantial, but I do not myself place weight on that in the light of the fact that it was negotiated at arm's length.[55]A further, and to my mind significant, point is that the assignment of six rents payable for just over five years was a very short period as compared with the total period of JLP's ownership. JLP was the owner of the freehold or long leaseholds, and, seen in the context of its entire period of ownership, this particular assignment was but a drop in the ocean. The rights of Rabobank were extinguished at the end of just over five years. Thus JLP did not dispose of anything of an enduring nature and JLP received the properties back entire and intact. The profit-generating quality of the properties was unaffected. In my judgment, the authorities show that those factors take the case outside the realisation principle (as I have termed it) and the analogy sought to be derived from the cases on premiums. As I explain below, the position would probably have been different if the disposal had been of rents for the entire period of its ownership but in any event the Revenue do not contend that anything other than a short-term disposal of the rents constitutes income (see paragraph 12 , above). Moreover, I would not accept that the fact that the rent paid by JL to JLP would be income in the hands of JLP is irrelevant. In my judgment, the authorities on compensation examined above show that the nature of the asset which gives rise to the payment is a very important factor on the capital/income question: it can give it its "essential character".[56]Each case in this field must depend on its particular circumstances. The duty of the court is to look at all the relevant considerations and weigh them appropriately, applying common sense rather than any fixed legal precept. It is helpful to pose the question which Lord Hoffmann said in MacNiven ought to have been asked in McGuckian :
"The question was not whether the assignment should be disregarded but whether, from a commercial point of view, it amounted to an exchange of income for capital. Such exchanges usually have a commercial reality "
[57]The next question is: what is it that according to Lord Hoffmann will usually have commercial reality? It is not open to the court to disregard the assignment itself. Accordingly, in the context of the observation cited in the preceding paragraph, it seems to me that Lord Hoffmann must be referring to commercial reality as an exchange of income for capital or vice-versa. For that reason Lord Hoffmann takes the example of the purchase or sale of an annuity (meaning as I understand it the exchange of a lump sum for the instalments of an annuity), since instalments of an annuity without doubt provide an income stream in the absence of special circumstances. In this case, therefore, the question is whether the conversion by JLP of the rents into the proceeds has commercial reality as an exchange of income for capital.[58]Unfortunately for the court, the Special Commissioner did not consider this question as he considered that he was bound by Paget to hold that the proceeds were capital. It would have been helpful to me to have had his assessment of the commercial reality. Mr Haberman's evidence does not assist since the description of the transaction as a financing transaction is equivocal: a transaction could provide financing whether it gave rise to a receipt which was income or capital in nature. I must accordingly do the best I can without assistance. Balancing the relevant factors in this case, the telling factors to my mind are first the nature of the asset transferred and second the nature of the payment.[59]The asset transferred consisted of the six rents plus the rights to recover the same. The rents and those rights were income in the hands of JLP. If asked to identify the "business" substance or commercial reality of the matter, a businessman or woman would, as it seems to me, looking at all the circumstances of this transaction, say "JLP has entered into an arrangement with its bankers to discount six rents" or "JLP has entered into arrangements to receive accelerated payments of rent, discounted for early payment" I do not consider that he or she would say:
"JLP has sold a part of five of its properties" or "
JLP has sold six choses in action under leases relating to five of its properties." It is true that JLP received a lump sum but that is because it chose to aggregate a number of rentals together and to receive a single accelerated payment for them. In those circumstances the fact that JLP received a lump sum is of less weight. Furthermore, as the authorities make clear, the fact that the assignment transferred an interest in property and choses in action is not a determining consideration since it is not the juristic classification with which this question is concerned. Moreover, I do not consider that JLP can in any business sense be said to have exploited the ability of the properties to generate rents after the period covered by the assignment.[60]Mr Goldberg submits that by assigning the rents JLP has parted with part of its property and therefore, it follows, JL received a capital payment. I do not accept this argument. The assignment of the right to recover the rent did not impede JLP from recovering rents in the future. Like the turves in Lowe v Ashmore, the rents and the choses in action are property that will recur. To focus on the once and for all disposal of the particular six rents is to disregard the full picture. The assignment does not result in a disposal of any income-producing part of the property as opposed to income, and this is required by the realisation principle as I have termed it. The resultant diminution in the market value of the properties was only a temporary fluctuation in value. A reduction in capital value does not in my judgment denote that JLP made a disposal of a capital asset. As investment properties, the properties will have been valued on a yield basis, and this is bound to be temporarily affected by the assignment. However, that factor does not make the assigned rents part of a capital asset. They remain income. The court can take into account also the fact that the fluctuation in value is only temporary. When looking at the business substance of the matter the court is not restricted to looking at the dip in value at the date of the assignment and not what happened thereafter. If the position were otherwise, the fact that Mallardchoice paid 99% of the dividend back to Shurltrust in McGuckian might have to have been disregarded. In short, save on a short-term basis, the income-earning capacity of the properties with respect to subsequent rents was unaffected.[61]As to the nature of the payment, it is clear from the authorities that the fact that it was calculated by reference to rents does not make it income. Here, however, rentals were not simply a measuring stick: they were the asset in reality realised by the whole transaction. The amount of the proceeds represents the present value of the rent. Moreover, in a practical sense, risk of default was not transferred. If the tenant defaulted, Rabobank had the right to put JLP back in the position it would have been in if the rent on which default had occurred had not been assigned. Because risk was not transferred, JLP continued to account for the rents in its statutory accounts as and when received rather than taking credit in its accounts for the proceeds in the year of receipt. Significantly it included the receipts as rents and not by any other description.[62]What then is the business substance or commercial reality of the "proceeds"? In my judgment, in all the circumstances of this case, they must take their capital/income colour from the rentals which they represented. Instead of receiving rents as and when they fell due, JLP simply realised them in a different way. The assignment is not to be disregarded. The fact, however, that the process involved the necessary interposition of a bona fide third party bank, which received the rents and paid the proceeds out of its own resources should not deflect the eye from the real nature of the transaction. A third party was interposed in the McGuckian case and in the compensation cases. The commercial reality of the assignment is that JLP discounted the rents. It seems to me to follow that, whatever terminology the parties used in the deed of assignment, the commercial reality of what JL received was discounted rents and hence income. The transaction effected no change in JLP's programme of investment in properties. JLP merely realised the six rentals in question in another way. What the transaction was intended to effect, from a practical and business point of view, was an accelerated payment of the rents, discounted for early payment. I cannot see that the proceeds should be capital any more than they would have been if JLP has sold the rents each year for six years by six separate transactions.[63]I would accept that the position would probably have been different if JLP had itself been entitled to a headlease for fifty years and had sold the rents for the entire period of its headlease in one transaction. If that is right, then depending on the circumstances an assignment of rents occurring over a lesser period than the period of ownership may suffice. However, all that happened here was, comparatively speaking, but a ripple in the rental stream, and, when the full circumstances are examined, the assignment did not as a commercial matter change the nature of the receipt from income to capital.[64]For all these reasons I consider that the proceeds of the assignment were, as a matter of business and commercial reality, income and not capital. In the circumstances, I would allow this appeal. The subsidiary question – the head of charge[65]Schedule A brings into charge annual profits "in respect of any such rents or receipts as follows 1. receipts arising to a person from or by virtue of his ownership of an estate or interest" in land. Mr Goldberg submits that the assignment was the sale of an interest in land. I agree with the judge that these words, in particular the words "by virtue of", are wide and general and cover the proceeds on the basis they are income.[66]Case VI of Schedule D charges to tax annual profits or gains not falling under any other case of Schedule D and not charged by virtue of Schedules A, C or E. Mr Goldberg argued that such profits and gains must be profits or gains of the same genus as profits or gains arising under other heads of charge, relying on a passage from the judgment of Blackburn J in Attorney-General v Black (1871) LR 6 Exch D 308, quoted by Viscount Dunedin in Jones v Leeming [1930] AC 415, 422, that to be chargeable under general sweeping provisions in Schedule D (as it then stood) the receipt had to be of the same nature and kind as had been previously mentioned. This was applied by Viscount Dunedin in the context of a question as to income or capital. In my judgment, the proceeds would fall within the genus established by Schedule A since it arises from a sale of rents arising from an estate or interest in land. Accordingly, on the basis that the proceeds are income, and if I am wrong in concluding that the proceeds are taxable under Schedule A, in my judgment they are brought into charge by Case VI of Schedule D.[67]Accordingly, I would dismiss the respondent's notice. Lord Justice Dyson: Introduction[68]The question whether a payment is to be regarded as capital or income has troubled the courts for a very long time. There are statements of the highest authority which indicate that classification cannot be made by the application of something akin to a simple litmus test. Various guidelines have been given from time to time. But it has been repeatedly emphasised that much depends on the nature of the transaction and the matrix in which it is set. Thus, in Van der Berghs Ltd v Clark [1935] AC 431 , 439, Lord Macmillan said: "While each case is found to turn upon its own facts, and no infallible criterion emerges, nevertheless the decisions are useful as illustrations and as affording indications of the kind of considerations which may relevantly be borne in mind in approaching the problem".[69]In Strick (Inspector of Taxes) v Regent Oil Co Ltd [1966] AC 295 , 313F Lord Reid said:
"So it is not surprising that no one test or principle or rule of thumb is paramount. The question is ultimately a question of law for the court, but it is a question which must be answered in light of all the circumstances which it is reasonable to take into account, and the weight which must be given to a particular circumstance in a particular case must depend rather on common sense than on strict application of any single legal principle."
[70]Similar observations were made by Lord Morris at page 328B and Lord Upjohn at page 343E and 345C. Common sense is a necessary tool for any judge to use in reaching a decision. But it is not a sufficient one. The authorities do provide some assistance in pointing the way to finding what circumstances are relevant. As Lord Wilberforce pointed out in Strick , in the course of the numerous decisions which have distinguished between capital and revenue expenditure in relation to widely different trades and varying circumstances, certain "tests" have emerged. But as he said (page 348B-E): "These may be useful, so long as it is recognised that they have emerged a posteriori from the facts of a given situation and that they may not always be suitable as guiding lines in other situations. I begin by asking two questions, which may be said to be generally relevant: what is the nature of the payment, and for what was the payment made? These, together with a third question, namely, how that, for which the payment was made, was to be used, were stated by Dixon J in his classic judgment in Sun Newspapers Ltd v Federal Commissioner of Taxation 61 CLR 337, 363".[71]Dixon J said there were:
"three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment."
[72]The discussions by Lord Wilberforce and Dixon J were in the context of cases about expenditure. The present case concerns the classification of a receipt. I accept that a payment which is properly classified as capital expenditure is not necessarily classifiable as a capital receipt in the hands of the payee. Nevertheless, it was common ground before us that the parallels are sufficiently close for the guidance afforded by the expenditure cases to be of assistance in determining whether a receipt is capital or income.[73]One final introductory observation. In relation to the classification of expenditure, Dixon J said in Hallstroms Proprietary Ltd v Federal Commissioner for Taxation 72 CLR 634 , 648:
"What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process."
It is common ground that this approach should be applied equally to the classification of receipts. Strick in more detail[74]It is worth examining Strick in a little detail, because in my view the speeches contain material which is of some relevance to the question that arises on this appeal. In Strick, what was at issue was whether premiums paid for 4 leases for terms of years at a nominal rent were payments of a capital or revenue character. The leases were part of a series of transactions whereby "ties" were created between an oil company and service station retailers. The leases ranged in length from 5 to 21 years. Lord Reid said (page 325) that he had no doubt that the lump sums paid for the 21-year ties could not be treated as revenue outgoings even if there were no lease or sub-lease. The very length of the period of the arrangement for which the lump sums were paid indicated that they were capital payments. With regard to the 10 year and 5 year leases, he said that the fact that there had been the grant of leases and sub-leases was highly relevant and that this pointed to the lump sums as being capital payments. He continued at page 325F:
"Premiums paid for leases have always been regarded as capital but we were not referred to any case where a premium had been paid for a very short lease – say two or three years, and I do not wish to decide whether even in such a case a premium would necessarily be treated as capital outlay. But I am satisfied that the weight of this factor in the present cases is sufficient to turn the scale if otherwise there were doubt, and I would therefore hold that in each of the four cases the lump sums paid by the appellants cannot be allowed as revenue outgoings."
[75]Lord Morris agreed that each of the lump sums was a capital payment. At page 334E, he said:
"Aided by the word pictures or descriptions of a capital asset which the decided cases contain I consider that a tie of the kind now being examined is a capital asset. If a lump sum is paid for such a tie for five years (or for a lesser number of years) it would give a false and unreal picture if the whole sum were debited to the profit and loss account for the first year or for the year in which the payment was made. If it is said to be hard that no part of the lump sum can be a debit in the profit and loss account that is merely to voice regret that there is no statutory provision which enables periodic allowances to be made. That however is not a matter for the courts."
[76]Lord Pearce said (page 336E) that the fact that an interest in land was being acquired pointed strongly to a capital expenditure. But he also said that, if the premiums had been paid without any acquisition of an interest in land, they would have been of a revenue nature where the transaction was only for a 5 year period; but would probably have been capital where the transactions were for a 21 year period, because such transactions would have acquired "a more enduring and structural quality" (page 336C-E).[77]Lord Upjohn said (page 341B-G) that it was axiomatic that a premium for the acquisition of a lease was a capital payment regardless of the duration of the lease. He then went on to consider what the position would have been if there had been no acquisitions of leases, but merely ordinary trading contracts for the same considerations and for the same terms of years as were the subject of the leases. He emphasised that the case concerned trading contracts and that for that reason the payments were not lightly to be held to be capital. But, he said, "the amount of the payment and the length of the tie are important elements among all the other facts" (page 345G). He then said this:
"But the amount of the payment and the length of the tie are important elements among all the other relevant facts. I part company at once with the submissions of counsel on both sides on the one hand that a lump sum payment for a tie for more than an annual accounting period is necessarily capital and, on the other, that it is a trading expense and the length of the tie is utterly immaterial save as a factor in calculating the anticipated gallonage and so the amount of the lump sum payment. The lump sum payments here are large. But one must not attribute to that too much importance because after all the lump sum payment is calculated on the basis that it represents no more than one penny per gallon on the expected sales over the length of the tie. So I approach this matter as one of judicial common sense ..."
[78]He concluded his speech by looking at each of the four transactions without regard to the fact that they had included the acquisitions of leases. Of the 21 year ties, he said that "to pay substantial sums for a tie for as long as 21 years is quite plainly, as a matter of common sense, a tie which must be described as of a capital nature", so that the sums paid for these were to be regarded as capital. The length of the 5 year tie put it into the "character of a merely long term trading contract" which would have been an ordinary trading expense. The 10 year tie was in the judgment of Lord Upjohn a "borderline case".[79]Finally, Lord Wilberforce. He was not willing to decide the appeal on the narrow ground that, in relation to an asset so concrete as a lease, at any rate when the term of the lease amounts to 5 years or more, the test of "durability" is satisfied (page 351G). He considered that the test should not be affected by whether a lease had or had not been granted as part of the consideration for the payment. In his view, there are cases where the transience of the asset acquired is relevant in determining whether it is capital in nature: it depends on the nature of the asset. In the instant case, he thought that:
"Here the nature of the payments – lump sums – the nature of the advantages obtained – security in respect of the placing of orders for a period – the substantial periods involved, the shortest being a period of five years, more than adequately establish the expenditure as made for the acquisition of capital assets."
He went on to say that he could see no logical basis for saying that 21 or 10 years was good enough to qualify as capital, but 3 or 5 years was too short, or for saying that 5 years or 3 years may be long enough when there is a lease, and not long enough where there is merely a personal covenant. Indicia of a capital payment[80]I would identify the following factors in a case such as the present as being relevant to the question whether a payment is capital or income. I emphasise "such as the present" because the guidance derived from cases dealing with one situation may have little application to a wholly different situation. The first factor is duration. If what is disposed of is long-lasting, it is more likely to be a capital asset than if it is something which is evanescent. The cases show that an asset which has an enduring or long-lasting quality is likely to be regarded as a capital asset, and payment received for its acquisition a capital receipt. The converse may not, however, be true. As Lord Wilberforce pointed out in Strick (page 353F), if on a consideration of the nature of the asset in the context of the trade in question, it is seen to be appropriate to classify it as fixed rather than as circulating capital, "the brevity of its life is an irrelevant circumstance". Context is, therefore, all important. But in the context of the disposal of the right to receive income for a lump sum, the period over which the income is receivable is relevant to the proper classification of the payment for tax purposes. The majority of their Lordships in Strick considered that, if a premium had been paid for a tie in respect of a period of 21 years, but without the grant of a lease, the payment would have been capital.[81]Secondly, the value of the asset assigned is also a relevant factor: see, for example, per Lord Upjohn in Strick , at page 345G-346C.[82]Thirdly, the fact that the payment causes a diminution in the value of the assignor's interest is material. In my view, there is nothing in the authorities to indicate that, unless there has been a permanent impairment of the value of the property, the payment cannot be capital. It is true that in some of the cases, the fact that the value of the property was permanently diminished was regarded as pointing decisively towards the conclusion that the payment was capital. Examples of these are the cases grouped together by Arden LJ as illustrative of what she terms "the realisation principle". Examples are Glenboig Union Fireclay Co Ltd v IRC 1922 SC (HL) 112 , Trustees of Earl of Haig v IRC 1939 SC 676 , Nethersole v Withers (1948) 28 TC 501 and McLure (Inspector of Taxes) v Petre [1988] 1 WLR 1386. But these authorities do not support the corollary that, absent a permanent diminution in the value of the property, the payment cannot be capital. Indeed, in Nethersole Lord Greene MR made the very point at page 510:
"One might perhaps have expected that where a piece of property, be it copyright or anything else, is turned to account in a way which leaves in the owner what we may call the reversion in the property, so that upon the expiration of the rights conferred, whether they are to endure for a short or a long period, the property comes back to the owner intact, the sum paid as consideration for the grant of the rights, whether consisting of a lump sum or of periodical or royalty payments, should be regarded as of a revenue nature."
[83]He continued at page 511:
"A principle on some such lines as these would not, we think, be out of accord with the popular idea of the distinction between capital and income. But it is not, we think, open to this Court to adopt it as in itself affording a sufficient test "
[84]The fact that the diminution is not permanent is not fatal to the classification of the payment as capital. Clearly, if the diminution is permanent, that will suggest strongly that the payment is capital. But the converse is not true. Otherwise, it is difficult to see how the receipt of a premium for the grant of a lease at a nominal rent can ever be capital, because the grant of such a lease diminishes the value of the landlord's reversion, but only for the duration of the lease. And yet it is plain that the premium for the grant of such a lease for even a short period is capital: see Strick . I should add that, in my view, the question whether there has been a diminution of the value of the assignor's interest should be judged at the date of the assignment. At that date, there has been a diminution in its value: if the assignor were to sell his reversion at that date, he would receive less than if he had not disposed of the right to receive the income from the asset for a period of time.[85]I would, therefore, hold that the fact that the disposal of the asset has caused the value of the assignor's interest to be diminished is a relevant factor. It seems to me that the amount by which the value of the reversionary interest is diminished is also of some materiality. This should reflect the duration of the asset that has been assigned (my first relevant factor) and its value (my second relevant factor), so that it is likely that the longer the period and the greater the value of the asset, the greater will be the diminution in the value of the reversionary interest. The greater the diminution in the value of the reversionary interest, the more likely it is that the payment should properly be classified as capital.[86]The fourth relevant factor is whether the payment is of a single lump sum. If a payment is one of a series of recurring payments made at frequent intervals, it is likely to be income in the hands of the payee. On the other hand, a single lump sum for the once and for all disposal of a particular asset is more likely to be a capital payment. In Strick , Lord Reid pointed out (page 316G) that ever since the Vallombrosa case [1910] SC 519, "recurrence as against a payment once and for all has been accepted as one of the criteria in a question of capital or income". See also per Lord Morris at page 333B-334A. In some contexts, the fact that payments are recurrent does not tell one anything about whether they are of a capital or revenue nature. For example, in the context of trade, some capital assets only last a very short time and have to be replaced regularly. But a transaction such as a rent factoring agreement with which this appeal is concerned does not involve assets of that kind, any more than did the transactions examined in Strick. Mr Goldberg submits that the possibility of recurrence of payments does not, of itself, make a receipt income: there must be more than the mere possibility of recurrence, and in the context of the realisation of an asset, there must also be the existence of a trade relating to the asset: the possibility of recurrence is not relevant to a disposal of a capital asset by a non-trader. I agree that the possibility of recurrence of payments does not, of itself, make a receipt income. It is no more than a relevant factor. But I do not agree that the possibility of recurrence is irrelevant except in relation to the disposal of an asset in the context of trade. It seems to me that the observations of Lord Reid in Strick about the relevance of recurring payments were not intended to be restricted to the context of trade, but were quite general in their application.[87]Fifthly, if the disposal of the asset is accompanied by a transfer of risk in relation to it, that tends to suggest that the sum paid for the asset is capital: see per Lord Hoffmann in MacNiven (Inspector of Taxes)v Westmoreland Investments Ltd [2001] 2 WLR 377 at paragraph 54.[88]I should add that I agree with Arden LJ that this court is not bound by what Lord Romer said in Paget v IRC [1938] 2 KB 25. I do not propose to deal with the Australian authorities. Suffice it to say that Mr Henderson does not place much reliance on them.[89]Before I consider whether the judge was right to classify the lump sum payment made in the present case as a capital receipt, I wish to make two further general points. First, the difference between the tree and its fruit. Sir Nicolas Browne-Wilkinson referred to this as "the hackneyed simile" in McClure v Petre at page 1390D, adding that "it is the distinction between the fruit of the tree, which is income, and the tree itself, which is capital". This imagery undoubtedly serves a purpose in getting across in graphic form the basic idea of the distinction, but it may be more elucidatory in some contexts than in others. Sometimes, it merely begs the question: what is tree and what is fruit? I doubt whether the analogy is helpful in the present case. There is no doubt that if JLP had granted the bank, say, a 15 year lease of the properties for a premium, the premium would have been a capital payment: see Strick . But in what sense would that have been a disposal of the tree? And why would it be any more of a disposal of the tree than the mere assignment of the right to receive rents for 15 years? In both cases, JLP would retain its freehold interest intact, and in both cases the value of its reversion would be (temporarily) reduced by reason of the transaction.[90]The second point is that the way in which the lump sum has been calculated does not shed light on how it should be classified. Thus, the fact that it is equivalent to the value of 6 years' rent discounted for early receipt tells one little or nothing about whether the lump sum is capital or income. This point was made in Strick by Lord Reid (page 324C), and Lord Wilberforce (page 349D "it confuses the measure of the payment with the payment itself"), and by Lord Buckmaster in Glenboig at page 463-464. The present case[91]Mr Henderson submits that the payment to JLP was for "the inherently recurrent produce (the Rents) of income-producing assets (the Properties)": I quote from paragraph 21(a) of his skeleton argument. The payment was for future income. It operated as a "substitute" for future rents, and converted future income into present income. What was assigned to the bank was not the asset comprising the rent-producing properties, but the right to the rent itself. To use the well-known metaphor, the payment to JLP was not for the whole or part of a fruit-bearing tree, but for part of the fruit itself.[92]As I understand it, on this approach, the price paid for an assignment of the right to receive rent can never be capital in the hands of the recipient, no matter how large the sum and how many years' rent is assigned. This conclusion flows inevitably from the fact that the subject matter of the assignment is the produce of income-producing assets. But in my view this cannot be right. One only has to contemplate a case where the owner of a 30 year lease of property grants a sub-lease to a tenant for 25 years, and then for a lump sum assigns to a third party the right to receive the whole of the rents payable throughout the 25 year term. Whether one applies an intuitive practical common sense approach, or one applies the 5 factors that I have identified, the answer is the same: the lump sum should be regarded as capital. In such a case, the reality is that the owner disposes of a valuable asset for a capital sum, and it is immaterial that, if he had not disposed of the asset but had received the rent every year for 25 years from the tenant, the rent would have been income, and not capital, in his hands. As I have already pointed out, a majority of their Lordships in Strick thought that a lump sum for tie of 21 years (without the grant of a lease) would be a capital payment.[93]Mr Goldberg QC submits that the payment in the present case was for a part disposal of the properties, and effected a realisation of part of the asset which comprised the properties. Accordingly, the sum received for the realisation was capital. His primary submission is that the sale of the right to income, being the sale of an asset not in the course of trade, must produce capital, and does not produce income. This submission is of general application and has the merit of simplicity, but I cannot accept it. It does not do justice to the complexity of the issue of classification that is revealed by a consideration of the authorities.[94]Although I cannot accept the full breadth of Mr Goldberg's primary submission, I am of the view that this appeal should be dismissed. The starting point is that, as between JLP and the bank, the single lump sum payment was not a payment of rent. In this respect, the case is fundamentally different from the pre-payment by a tenant of a lump sum representing the discounted value of future rents payable by the tenant under a lease. It is common ground that a lump sum pre-payment of rent by a tenant is income in the hands of the landlord. It retains its character as income, notwithstanding that it has been converted into a lump sum. In such a case, there is no disposal by the landlord of an asset. But in the present case, there was a disposal of an asset. JLP's right to receive 6 years' rent was a chose in action which could be assigned for value. In my view, it is irrelevant that the rent paid by John Lewis to JLP would be income in the hands of JLP. The relevant question is: what was the lump sum paid by the bank in the hands of JLP? It is true that the payment was for future income. But it does not follow that the payment was of the same character as the future income for which it was made. It seems to me that so to characterise the lump sum payment is to make the mistake of confusing the measure by which the payment is calculated with the payment itself: see paragraph 90 above. To apply the words of Lord Wilberforce in Strick (page 349B), the lump sum was not, and did not represent the aggregation of, current payments made for the day to say use of or continuation of an advantage. It appeared at first sight to bear the character of a capital payment for an asset.[95]Arden LJ is of the opinion that the source or the nature of the asset from which the payment is derived has a strong influence on the characterisation of that payment as income or capital. Accordingly, in the present case, since the source of the payment is an assignment of income, that points strongly to the payment itself being income too. Reliance is placed on the compensation cases to illustrate this principle. The compensation cases show that where A receives a payment from B to compensate him for the loss of income, then the payment is treated as income. But in my view, the analogy between the compensation cases and the present case is by no means exact. Where A receives compensation for loss of income, the payment is a true substitute for, and therefore equivalent to, income. It fills a hole in his income.[96]Perhaps more importantly, if the source or nature of the asset from which the payment is derived has such a decisive role to play, it is difficult to see why it matters whether what is assigned is 5 years' rent, 21 years' rent or indeed rent payable over an even longer period. But as I have already stated, it is plain that the length of the period over which the rent is receivable is highly relevant in determining the true character of the payment for tax purposes.[97]I understand Mr Henderson to concede that, if JLP had granted the bank a 6 year lease at a nominal rent for a premium, the premium would have been a capital payment. That concession seems to me to be right on the authorities. Looking at the transactions from the bank's point of view, there probably are commercial differences between entering into a new lease for 6 years at a nominal rent and taking an assignment of the right to receive 6 years' rent under an existing lease. For example, the new lease may contain repairing and other obligations, although it need not do so. But what matters for present purposes is not how the two transactions are viewed by the bank, but how they are viewed by JLP. From JLP's commercial point of view, there are very real similarities between them. In each case,(a) the period is the same;(b) rent which is (or which, in the case of the new lease, absent the premium, would be) payable by the lessee is exchanged for a lump sum which is paid in advance;(c) the reversion is retained by JLP, and(d) the value of the reversion is diminished for (I assume) roughly the same period and, possibly, by roughly the same amount. In each case, JLP receives a lump sum which represents the value of the rent payable for the properties. The premium for the lease at a nominal rent reflects the amount of the rent that would be payable if the lease were not being granted at a nominal rent, discounted for accelerated payment. So too is the price payable for the assignment of the right to receive the rent actually payable to JLP equal to the value of that rent, discounted for accelerated payment. It is difficult to see in what sense there is any real difference from JLP's commercial point of view between the two transactions. It is true that the grant to the bank of a 6 year lease at a nominal rent for a premium is juristically different from the assignment to it of the right to receive the rents for 6 years, but as has been made clear in the cases, juristic labels have no part to play in the classification of payments for tax purposes.[98]It follows that I do not share the view of Arden LJ that cases on premiums have little relevance to the present case. That is not tantamount to treating the proceeds of the assignment as if they are a premium paid on the grant of a lease at a nominal rent, or to re-characterising the transaction as something other than it is. I recognise that there are differences between the two transactions. For example, where a premium is paid, there is created a capital asset, namely a lease, and in some contexts this may be a crucial point of distinction. But, whatever differences there may be between the two transactions and the two payments in other contexts, I do not consider that, from a practical common sense point of view, the differences are of sufficient substance to justify treating the two payments differently for purposes of taxation. Nor do I consider that a lessor who receives a premium for a 5 year lease at a nominal rent is any more able to say that he has realised an element of the capital value of his property than a lessor who has assigned the right to receive 5 years' rents. From a practical common sense point of view, in each case the lessor has exchanged the right to receive a stream of payments of rent for a single lump sum, and in each case the transaction will have temporarily reduced the value of his reversion.[99]I can now turn to apply the factors that I have earlier identified to the present case. The first is that the assignment is of 6 years' rent. It is difficult to say more about the period than that it is significant. Arden LJ makes the point, which she describes as "very significant" (paragraph 55), that the assignment of 6 rents payable over just 5 years related to a very short period when compared with the total period of JLP's ownership. I do not think that this is a factor to which much weight should be given. If it were otherwise, odd results would follow. I can illustrate the point by an example. Suppose JLP had a 5 year lease of property A and owned the freehold of property B, and had granted a sublease for 3 years on the first, and a 3 year lease on the second, and then for a lump sum assigned the right to receive the rents to a third party in both cases. Is it to be said that the lump sum is capital in the case of property A, but income in the case of property B? I would suggest not. The owner of the freehold owns the property for an indefinite period. It follows that, if a comparison between the period to which the rent relates and the duration of the assignor's ownership is significant, it could be said that a sum payable for the assignment of the right to receive payable under a 25 year lease would on that account be properly classifiable as income. I do not believe that this would be correct.[100]I turn next to the value of the asset assigned. The sum in this case, namely £25.5 million odd, is a substantial sum. Little more needs to be said. Thirdly, there was a diminution to the value of JLP's reversionary interests. That was the unchallenged evidence of Mr Asher. He did not, however, quantify the amount of the diminution. It is reasonable to infer from the size of the lump sum that, at the time of the assignment, the diminution was significant. But the amount of the diminution attributable to the assignment will have reduced with the passage of time. As I have already said, the value must be judged at the date of the assignment and it does not have to be permanent.[101]The fourth factor is that the payment in the present case was of a single lump sum. It was not one of a series of recurring payments.[102]Finally, there was a transfer to the bank of the risk of non-payment of the rents. It is, however, true that the effect of the indemnities secured by the bank was that the transfer of risk was somewhat theoretical, since it depended on the insolvency of JL.[103]In my judgment, the cumulative effect of these considerations is that the payment made by the bank was one of capital. The sum was substantial, it was a single payment for the once and for all disposal by JLP of 6 years' rents, which resulted in a diminution in the value of its reversionary interests. In reaching my conclusion, I have been influenced by the fact that, if JLP had granted the bank 6 year leases at nominal rents, the premiums payable would have been capital payments. For the reasons that I have given, judging the matter from JLP's point of view in a practical common sense way, I consider that the differences between such a transaction and the one which they in fact entered into are not sufficiently significant that they should lead to a different fiscal result.[104]For these reasons, I think that the judge reached the right conclusion, and I would dismiss this appeal. On the head of charge issue, I agree with the reasoning of Arden LJ. Lord Justice Schiemann :[105]I am grateful to Arden and Dyson LJJ for their careful analyses of the existing case law. Having no separate contribution of any substance to make I find myself in the unenviable position of having to choose between them.[106]Like others who are more at home in this field than I am, I have been unable to find a satisfactory conceptual distinction between capital and income which explains all the cases to which Arden and Dyson LJJ have referred.[107]It seems to me reasonably clear that had the present transaction involved the grant of a lease to Rabobank at a nominal rent and with a premium equal to the amount of the proceeds then those proceeds would be regarded as a capital receipt. I understand Arden LJ in her paragraphs 32 - 37 to accept this.[108]What seems on their analyses to be critical is whether the present transaction is for present purposes to be regarded as equivalent to such a transaction. I think it is.[109]Although one talks about the value of property, this conceals the fact that what really falls to be valued is the value of an interest in property. Where Tom, who has an interest in property, grants to Dick out of that interest a lease for a premium, the value of Tom's interest in the land is undoubtedly diminished in the sense that if Tom sought to sell his interest in the land to Harry, Harry will pay him less than he would have paid had Tom not granted the lease to Dick.[110]In the present case, although JLP has not granted a lease to Rabobank, it seems to me that the value of JLP's interest in the land has been diminished to much the same extent as if it had. Harry would pay significantly less for any assignment of JLP's interest than he would have paid had the deal with Rabobank not been concluded.[111]Of course it is true that the diminution of the value of Tom's or JLP's interest is matched by the receipt of monies, but that is true in either case. So that is not a satisfactory ground of distinction between them.[112]We are concerned with the classification of the monies received by Tom or JLP. For my part I see no reason for distinguishing the two situations described above. There is room for argument as to whether those monies should be regarded as capital or as income, but in my judgment the classification should be the same.[113]For the reasons given by Dyson LJ I consider that the Special Commissioner and Lightman J did not fall into error in holding that the proceeds should be considered a capital receipt. Since this is the view of the majority of this court the argument as to head of charge thus does not fall to be resolved.[114]This appeal will therefore be dismissed.

Order

Appeal dismissed; Appellant do pay Respondent's costs of the appeal in this court and below; Application for permission to appeal to the House of Lords refused. (Order does not form part of the approved judgment)

Cited in 16 later judgments

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