MARTLAND,
J.
(concurred
in
by
Abbott,
Judson
and
Hall,
JJ.)
:—On
March
31,
1949,
the
respondent,
along
with
four
other
parties,
entered
into
an
agreement
with
John
Edward
Purcell,
pursuant
to
which
they
advanced
funds
to
Purcell
to
enable
him
to
purchase
a
seat
on
the
Toronto
Stock
Exchange
and
to
provide
working
capital
for
his
stock
brokerage
business.
It
is
conceded
that
the
respondent’s
interest
under
this
agreement
was
held
by
him
on
behalf
of
another
person
as
to
one-half
of
the
respondent’s
interest,
so
that
his
actual
interest
was
a
one-tenth
interest.
The
advances
made
by
the
parties
to
the
agreement
(who
were
therein
described
as
‘‘the
Lenders’’
and
who
will,
for
purposes
of
convenience,
be
thus
described
hereinafter)
were
described
as
being
“by
way
of
loan’’,
but
no
interest
was
payable
to
them
by
Pureell.
Instead,
the
agreement
provided
that
each
of
the
Lenders
would
receive
a
percentage
of
the
net
profits
of
the
business.
It
was
provided
that
Purcell
should
receive
an
annual
payment
for
his
services,
plus
10%
of
the
net
profits
of
the
business.
He
agreed
not
to
engage
in
any
other
business
and
to
devote
his
whole
time
and
attention
to
the
business.
He
also
agreed
to
obey
all
lawful
directions
of
the
Lenders
in
writing.
He
undertook
to
hold
the
Stock
Exchange
seat,
and
any
other
assets
acquired
by
reason
of
the
operation
of
the
business,
in
trust
for
the
Lenders.
By
letter,
dated
March
31,
1953,
to
Purcell,
the
respondent
agreed
that
the
provisions
with
respect
to
the
giving
of
directions
to
Purcell
by
the
Lenders
and
the
holding
of
his
Stock
Exchange
seat
in
trust
be
deleted.
Similar
letters
were
written
by
the
other
Lenders.
The
reason
for
the
deletion
of
these
provisions
was
that
they
conflicted
with
the
policy
of
the
Toronto
Stock
Exchange.
One
clause
of
the
agreement
provided
that
nothing
in
the
agreement
should
be
deemed
to
constitute
the
Lenders
as
partners
in
the
brokerage
business.
However,
the
learned
trial
judge
has
held
that,
notwithstanding
this
provision,
a
partnership
was
constituted
by
virtue
of
the
provisions
of
the
agreement
and
this
finding
was
not
challenged
on
the
appeal
to
this
Court.
The
appeal
was
argued
on
the
basis
that
a
partnership
was
created.
The
business
prospered
and
profits
were
earned
in
each
year
from
1950
to
1955
inclusive.
In
1955,
however,
the
Board
of
Governors
of
the
Toronto
Stock
Exchange
ruled
that,
as
the
Lenders
were
not
actively
engaged
in
the
business,
they
could
not
take
a
share
of
the
net
profits
of
the
business
and
the
profit-
sharing
arrangement
was
required
to
be
terminated
by
the
end
of
that
year.
In
consequence
of
this,
on
February
1,
1956,
a
second
agreement
was
made
between
Purcell
and
the
Lenders
or
their
successors
in
interest,
referred
to
in
this
agreement
as
‘‘the
Creditors”.
It
recited
the
ruling
of
the
Board
of
Governors
of
the
Toronto
Stock
Exchange
and
further,
notwithstanding
the
letters
regarding
the
deletions
from
the
first
agreement,
recited
that
the
Stock
Exchange
seat
was
held
in
trust
for
the
Lenders.
The
agreement
then
went
on
to
provide:
“1.
It
is
mutually
agreed:
(a)
That
to
date
the
advances
of
money
to
Pureell
by
the
Creditors
amount
to
$112,500.00.
(b)
That
the
increase
in
the
market
value
of
the
said
seat
on
the
Toronto
Stock
Exchange
is
fixed
at
$63,000.00.
(c)
That
the
share
of
the
Creditors
in
the
cash
surrender
value
of
the
insurance
policy
is
hereby
fixed
at
$4,850.00.
(d)
That
the
share
of
the
Creditors
in
the
net
profits
of
the
business
for
the
fiscal
year
ending
March
31st,
1956,
is
hereby
fixed
at
$300,000.00.
(e)
That
the
share
to
which
the
Creditors
are
entitled
in
the
good
will
of
the
business
is
hereby
fixed
at
$69,650.00.
Total
$550,000.00”
The
agreement
stated
that
the
original
agreement
should
be
terminated
by
mutual
consent,
that
the
Creditors
would
no
longer
be
entitled
to
share
in
the
net
profits
of
the
business
and
that,
as
consideration
for
the
termination
of
the
original
agreement,
the
giving
up
of
their
interest
in
the
Stock
Exchange
seat
and
in
the
physical
assets
of
the
business
and
their
right
to
share
in
the
profits
of
the
business,
Purcell
would
pay
to
the
Creditors
a
total
amount
of
$550,000.
Provision
was
then
made
for
the
terms
of
payment
of
this
sum
of
$550,000.
$150,000
was
to
be
paid
by
Purcell
by
April
15,
1956.
The
balance
of
$400,000,
until
paid,
was
to
carry
interest
at
the
rate
of
10%
per
annum,
payable
quarterly,
the
first
such
payment
falling
due
on
the
last
day
of
June,
1956.
The
respondent
was
assessed
for
income
tax
for
the
year
1956
in
respect
of
the
amount
of
$30,000,
being
his
one-tenth
interest
in
the
$300,000
referred
to
in
para.
(a)
of
Clause
1
of
the
agreement
recited
above.
The
assessment
was
confirmed
by
the
Tax
Appeal
Board
but,
on
appeal,
the
Exchequer
Court
held
that,
although
the
relationship
between
Purcell
and
the
Lenders
was
that
of
partners,
the
real
effect
of
the
second
agreement
was
that
Purcell
had
agreed
to
purchase
from
the
Lenders
their
interest
in
the
partnership
for
a
total
consideration
of
$550,000.
It
was
further
held
that
this
consideration
must
be
regarded
as
a
whole
and
that
the
recipients
thereof
would
be
in
receipt
of
a
capital
payment.
It
was
held
that
the
fact
that
the
consideration
included
an
item
associated
with
profits
did
not
affect
its
character
or
quality.
The
governing
provisions
of
the
Income
Tax
Act,
R.S.C.
1952,
e.
148,
are
the
following:
4
‘6.
Without
restricting
the
generality
of
section
3,
there
shall
be
included
in
computing
the
income
of
a
taxpayer
for
a
taxation
year
(c)
the
taxpayer’s
income
from
a
partnership
or
syndicate
for
the
year
whether
or
not
he
has
withdrawn
it
during
the
year
;
15.
(1)
Where
a
person
is
a
partner
or
an
individual
is
a
proprietor
of
a
business,
his
income
from
the
partnership
or
business
for
a
taxation
year
shall
be
deemed
to
be
his
income
from
the
partnership
or
business
for
the
fiscal
period
or
periods
that
ended
in
the
year.
(2)
Where
an
individual
was
a
member
of
a
partnership
the
affairs
of
which
were
wound
up
during
a
fiscal
period
of
the
partnership
by
reason
of
the
death
or
withdrawal
of
a
partner
or
by
reason
of
a
new
member
being
taken
into
the
partnership,
for
the
purpose
of
subsection
(1),
the
fiscal
period
may,
if
the
taxpayer
so
elects,
be
deemed
to
have
ended
at
the
time
it
would
have
ended
if
the
affairs
of
the
partnership
had
not
been
so
wound
up.”
Their
effect
is
that
income
from
a
partnership
must
be
included
in
a
taxpayer’s
income
for
a
taxation
year,
whether
or
not
he
has
withdrawn
it
during
that
year.
Such
income
in
a
taxation
year
is
his
share
of
the
partnership
income
for
the
fiscal
period
ending
in
that
year.
If
a
partnership
is
wound
up
during
a
fiscal
period
by
reason
of
the
death
or
withdrawal
of
a
partner,
the
taxpayer
may
elect
to
have
the
fiscal
period
of
the
partnership
deemed
to
end
at
the
time
it
would
have
ended
if
the
partnership
affairs
had
not
been
wound
up.
Applying
these
provisions
to
the
present
case,
the
respondent
would
become
liable
to
tax
for
the
year
1956
in
respect
of
his
share
of
the
partnership
income
(even
though
not
withdrawn
by
him)
for
the
fiscal
period
of
the
partnership
which
ended
in
1956.
That
period
ended
when
the
partnership
was
wound
up
on
the
date
of
the
second
agreement,
February
1,
1956,
but
the
partnership
profits
were
determined
by
the
agreement
itself
up
to
the
end
of
the
normal
fiscal
period
ending
March
31,
1956.
If
the
respondent
were
entitled
to
invoke
subsection
(2)
of
Section
15,
that
is
the
date
at
which
the
profits
would
be
ascertained.
Unless
he
were
able
to
establish
that
his
income
from
the
partnership
was
less
than
that
established
by
the
agreement,
it
would
appear
that
he
is
liable
for
income
tax
in
respect
of
it
(Johnston
v.
M.N.R.,
[1948]
S.C.R.
486;
[1948]
C.T.C.
195).
No
evidence
was
led
to
establish
that
his
share
of
Income
was
less.
Counsel
for
the
respondent
contended
that
these
profits
were
not
taxable
in
the
respondent’s
hands,
but
in
the
hands
of
Purcell,
because
the
respondent,
by
the
agreement,
sold
his
interest
in
the
partnership
business
to
Purcell
and
the
whole
of
the
payment
to
which
the
respondent
became
entitled
would
be
a
receipt
of
capital.
He
submitted
that
the
fact
that
the
price
was
determined,
in
part,
by
the
share
of
the
Lenders
in
the
partnership
profits
for
the
fiscal
year
ending
March
31,
1956,
does
not
alter
the
quality
of
the
payment
to
be
made
to
them
by
Purcell.
He
cited
the
statement
of
Lord
Macmillan
in
Van
den
Berghs,
Limited
v.
Clark,
[1935]
A.C.
431
at
442:
“But
even
if
a
payment
is
measured
by
annual
receipts,
it
is
not
necessarily
itself
an
item
of
income.
As
Lord
Buckmaster
pointed
out
in
the
case
of
Glenboig
Union
Fireclay
Co.
v.
Commissioners
of
Inland
Revenue
([1922]
8.C.
(H.L.)
112)
:
‘There
is
no
relation
between
the
measure
that
is
used
for
the
purpose
of
calculating
a
particular
result
and
the
quality
of
the
figure
that
is
arrived
at
by
means
of
the
test.’
”’
In
my
opinion
this
argument
fails
and
I
am
unable,
with
respect,
to
agree
with
the
conclusions
reached
by
the
learned
trial
judge
because
I
cannot
construe
the
agreement
of
February
1,
1956,
as
being
one
for
the
sale
of
interests
in
a
partnership.
It
is
rather
an
agreement
for
the
winding
up
of
the
partnership,
which
had
been
necessitated
by
the
decision
of
the
Board
of
Governors
of
the
Toronto
Stock
Exchange.
As
a
result
of
that
decision,
the
Lenders
were
thereafter
precluded
from
sharing
in
the
profits
of
the
business.
That
right
they
gave
up
in
the
agreement
because
they
had
been
compelled
to
do
so.
The
agreement
determined
the
amount
of
the
advances
by
the
Lenders
to
Purcell
(out
of
which
the
seat
on
the
Toronto
Stock
Exchange
had
been
purchased),
the
increase
in
value
of
that
seat,
the
cash
surrender
value
of
a
certain
insurance
policy,
the
value
of
the
goodwill
of
the
business
and
the
amount
of
the
Lenders’
share
in
the
profits
of
the
business
for
the
year
ending
March
31,
1956.
Purcell
agreed
to
pay
to
the
Lenders
the
total
of
those
various
amounts,
and
the
$400,000
balance
remaining
after
the
payment
of
$150,000
is
referred
to
in
the
agreement
as
a
‘‘loan’’,
which
bore
interest
as
in
the
agreement
provided.
Essentially,
therefore,
the
Lenders
were
withdrawing
from
the
business
the
capital
value
of
that
which
they
had
provided
to
it
in
the
form
of
capital
assets
and
were
to
be
paid
out
the
profits
which
they
had
acquired
out
of
the
operation
of
the
business.
The
character
of
each
of
the
items
described
in
Clause
1
was
not
altered
by
the
fact
that
they
were
totalled
at
the
end
of
the
clause.
This
being
so,
in
my
opinion
the
respondent
is
liable
to
income
tax
in
respect
of
his
share
of
the
partnership
profits,
as
determined
by
Clause
1(d)
of
that
agreement.
The
appeal
should
be
allowed
and
the
assessment
restored
with
costs
both
here
and
in
the
Exchequer
Court.
SPENCE,
J.
(dissenting)
:—I
have
read
the
reasons
of
my
brother
Martland
herein
and
I
wish
to
adopt
his
outline
of
the
relevant
facts.
The
learned
Exchequer
Court
Judge
found
that
the
arrangement
carried
on
between
the
Creditors
and
Mr.
Purcell
under
the
agreement
of
March
31,
1949
(Ex.
1)
was
a
partnership
(case
p.
110)
and
neither
party
disputed
that
finding
in
this
Court.
When
the
respondent
was
absent
in
England,
his
secretary,
as
was
her
usual
course,
made
up
his
income
tax
return
form
T.l
General
and
a
photostat
copy
thereof
was
filed
as
Exhibit
A
upon
the
trial
before
Ritchie,
D.J.
in
the
Exchequer
Court.
In
the
schedule
attached
to
the
said
income
tax
return
there
w
as
shown
in
the
recapitulation
of
income
an
item
which
read
‘‘
Purcell
invest.
account,
$32,000.00’’
and
written
opposite
the
words
‘Purcell
investment
account’’
ar
the
words
‘‘T.20
in
file
of
Jack
Purcell”.
There
was
no
explanation
at
the
trial
as
to
who
endorsed
the
last
mentioned
memoranda
on
the
form.
The
Minister
of
National
Revenue
issued
a
re-assessment
notice
to
the
respondent
under
date
of
March
5,
1958,
adding
to
the
tax
assessment
the
sum
of
$697.57
plus
$33
interest,
a
total
of
$728.57.
The
respondent
filed
notice
of
objection
to
that
re-assessment
under
date
March
31,
1958,
and
in
a
“Statement
of
Facts
and
Statement
of
Reasons
for
Objection’’
attached
thereto
took
the
position
for
the
first
time
that
as
to
$30,000
of
the
sum
of
$32,000
referred
to,
supra,
the
respondent
received
on
his
own
account
only
the
sum
of
$15,000
and
not
$30,000,
and
that
that
receipt
was
a
capital
receipt
and
should
not
be
taxed
as
income.
It
will
be
seen
that
the
sum
of
$15,000
is
10%
of
the
sum
of
$150,000
which
was,
by
virtue
of
the
agreement
of
February
1,
1956,
to
be
paid
immediately
to
the
“Creditors”
and
the
respondent
was
entitled
to
10%
of
the
amounts
payable
under
that
agreement.
The
discussions
preceding
the
execution
of
the
agreement
of
February
1,
1956
are
dealt
with
in
the
evidence
of
the
respondent
at
trial
(p.
37
ff.).
It
should
be
noted
that
the
respondent
was
the
only
witness
called
at
the
trial
and
therefore
there
is
no
denial
of
any
evidence
given
by
him.
At
p.
37,
line
21,
the
respondent
said
:
“The
agreement
sets
it
out
in
detail
as
to
how
the
$550,000.00
was
reached.
Mr.
Cross:
Do
you
remember
the
figure
of
$550,000.00
was
reached;
was
there
any
audit
of
the
books
of
Jack
Purcell
made?
A.
I
don’t
remember
if
there
was
any
audit
but
I
do
recall
his
auditor
attended
one
or
more
than
one
meeting
and
gave
some
sort
of
estimate
as
to
how
much
money
would
be
there
but
I
don’t
think
he
would
be
able
to
make
an
audit
at
the
end
of
December
because
his
year
ended
in
March
and
no
one
would
know
what
he
would
do.
It
was
an
indication,
not
an
audit.
It
couldn’t
have
been
an
audited
figure—$300,000.00
is
obviously
an
error
.
.
.
Q.
Had
there
been
a
quick
audit
by
the
Stock
Exchange
shortly
before
that?
A.
I
don’t
know,
I
couldn’t
tell
you.
I
know
they
do
a
sub-audit
but
I
don’t
know
.
.
.
I
paid
no
attention
to
the
business.
I
was
in
the
office
twice;
once
at
Christmas
time
and
.
.
.
Q.
If
the
lenders
were
partners,
you
say
they
were
not,
and
if
they
were,
as
partners,
entitled
to
profits
at
the
time
the
agreement
of
February
1st,
1956,
was
entered
into,
you
do
not
dispute
the
amount
of
those
profits
would
be
$300,000.00?
A.
I
don’t
dispute
or
deny.”
Then,
at
p.
38,
line
21:
“His
Lordship:
And
then
on
this
seat,
$30,000.00
profits
for
period.
It
does
not
show
what
period.
I
have
the
fixed
impression
from
the
evidence
I
have
heard
that
this
was
an
end
agreement
in
consideration
of
the
lenders
relinquishing
any
rights,
and
further
right,
for
a
negotiated
settlement.
The
witness:
That
was
the
point.
Mr.
Cross
:
I
think
the
$550,000.00
..
.
.
His
Lordsip:
The
$550,000.00
made
up
of
the
other
items
I
have
mentioned,
an
amount
of
$112,500.00
and
then
the
cash
surrender
value,
the
increase
of
the
Stock
Exchange
seat
and
then
those
items
total
$150,000.00.
Is
that
right?
The
Witness
:
Yes,
my
lord,
you
put
it
perfectly
and
that
is
the
situation.
It
was
an
end
agreement
and
the
figure
of
$300,000.00
may,
for
all
I
know,
bear
some
relation
to
some
profit
that
had
been
earned
but
it
was
an
agreed
figure,
it
is
not
an
accounting
figure.
His
Lordship:
I
think
it
is
a
negotiated
figure.
The
Witness:
A
negotiated
figure.’’
I
have
come
to
the
conclusion
that
some
of
the
amounts
set
out
in
para.
(1)
of
the
agreement
of
February
1,
1956,
which
total
$550,000.
must
have
been
on
the
basis
of
negotiation
or
estimate.
Paragraph
(a),
the
advances
made
by
the
Creditors
to
Mr.
Purcell,
$112,500,
is
a
fixed
and
easily
ascertainable
item.
Paragraph
(b),
the
increase
in
the
market
value
of
the
seat
on
the
Toronto
Stock
Exchange,
$63,000,
can
only
be
an
estimate
or
judgment
of
what
the
seat
would
be
worth
if
it
had
been
sold
on
the
market
on
that
day.
Such
an
estimate
might
well
be
based
on
the
last
similar
sale
of
such
a
seat
but
the
estimate
might
be
higher
than
or
lower
than
the
amount
of
the
sale
price
in
the
last
previous
sale
depending
on
the
difference
in
stock
market
conditions
between
the
date
of
the
last
previous
sale
and
February
1,
1956.
Paragraph
(ec),
the
share
of
the
Creditors
in
the
cash
surrender
value
of
the
insurance
policy,
($4,850)
is,
of
course,
a
figure
which
could
be
ascertained
exactly.
Paragraph
(d),
the
one
in
question
in
this
appeal
and
which
reads
‘‘That
the
share
of
the
Creditors
in
the
net
profits
of
the
business
for
the
fiscal
year
ending
March
31st,
1956,
is
hereby
fixed
at
$300,000.00’’
must
be
considered
in
the
light
of
the
evidence
given
at
trial
part
of
which
has
been
set
out
above.
There
was
no
division
of
profits
during
the
course
of
a
fiscal
year
in
this
partnership
and
there
was
no
audit
which
would
enable
anyone
to
say
with
any
exactness
what
the
profits
would
be
at
the
end
of
the
fiscal
year,
March
31,
1956.
One
need
only
consider
the
nature
of
the
business
of
the
partnership
to
understand
how
inaccurate
an
estimate
might
be
of
the
profits
for
the
year
when
that
estimate
was
made
two
full
months
prior
to
the
end
of
the
fiscal
year.
In
a
stock
brokerage
business
those
two
final
months
might
have
been
disastrous
so
that
the
profits
could
have
been
reduced
drastically
or
they
may
have
been
very
profitable
so
that
the
profits
would
far
exceed
the
estimate.
It
would
appear,
from
one
question
put
to
the
respondent
upon
the
trial,
that
the
profits
actually
much
exceeded
the
figure
of
$300,000.00.
The
share
of
the
goodwill
to
which
the
Creditors
were
entitled,
$69,650,
again
illustrates
the
negotiated
or
estimated
character
of
the
various
items
set
out
in
these
paragraphs
as
no
one
could
put
an
exact
amount
to
include
a
$50
item,
upon
such
a
nebulous
asset
as
goodwill.
It
is
quite
evident
that
para.
(a),
the
advances,
and
(c),
the
cash
surrender
value
of
the
insurance
policy,
were
the
only
fixed
amounts
in
the
calculation
and
that
the
other
three
paragraphs
(b),
(d)
and
(e)
were
all
negotiated
or
estimated
figures
to
reach
the
total
of
$550,000.
The
Minister
has
assessed
the
tax
upon
the
item
of
$30,000
as
being
profits
to
which
the
respondent
was
entitled
for
the
operation
of
the
business
in
the
fiscal
year
ending
March,
31,
1956,
and
which
would
eventually
have
been
paid
to
him
apart
from
the
agreement
made
on
the
1st
of
February,
1956.
The
Minister
relies
on
Section
6(c)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148,
and
Section
15(1)
and
(2)
of
the
said
statute.
Certainly,
if
the
respondent
had
or
was
entitled
to
receive
an
income
from
the
operation
of
this
partnership
in
the
year
1956,
he
must
pay
tax
upon
that
income.
The
position,
however,
of
the
respondent
is
that
he
never
did
become
entitled
to
receive
any
income
from
the
operation
of
the
partnership
during
the
fiscal
year
1956,
because
on
February
1,
1956,
by
the
agreement
of
that
date
he
and
his
fellow
Creditors
conveyed
to
Mr.
Purcell
all
of
their
rights
to
the
profits
for
that
year’s
operations
and
all
the
rights
they
had
to
any
other
assets
of
the
partnership.
By
para.
2
of
the
said
agreement:
It
is
further
agreed
that
the
Original
Agreement
shall
be
terminated
by
mutual
consent
of
the
Parties
hereto
for
the
reasons
set
out
in
the
third
recital
hereof,
and
that
the
Creditors
shall
no
longer
be
entitled
to
share
in
the
net
profits
of
the
business.
As
consideration
for
the
Creditors
terminating
the
Original
Agreement
and
giving
up
their
interest
in
the
Stock
Exchange
seat,
and
in
the
physical
assets
of
the
business
as
aforesaid,
Purcell
covenants
and
agrees
to
pay
to
each
of
the
Creditors
the
amount
set
opposite
his
name
below,
totalling
in
all
$550,000.00,
payable
at
the
times
hereinafter
set
forth
:—’’
I
am
of
the
opinion
that
what
the
Creditors
and
Mr.
Purcell
accomplished
by
the
agreement
(Ex.
3)
dated
February
1,
1956
was
not
a
mere
dissolution
of
the
previously
existing
partnership
but
a
sale
by
all
of
the
partners
except
Purcell
of
their
interests
in
all
of
the
partnership
assets
to
Purcell.
I
am
of
the
opinion
that
a
dissolution
of
a
partnership
necessarily
implies
a
division
of
the
assets
of
the
partnership,
after
payment
of
its
creditors,
amongst
the
partners
in
proportion,
of
their
respective
shares
in
the
partnership.
In
the
present
case,
there
was
no
attempt
at
realization
of
the
partnership
assets
and
no
division
of
the
assets
either
by
money
or
in
specie
between
the
former
partners
who
were
designated
in
the
said
agreement
(Ex.
3)
as
Creditors,
nor
does
there
seem
to
have
been
even
an
accurate
evaluation
of
those
assets.
The
business
of
the
partnership
was
carried
on
exactly
as
before
by
Mr.
Purcell
who
had
been
prior
to
that
date
the
manager
and
one
of
the
partners
of
the
partnership
business
and
who
thereafter
became
the
sole
proprietor
subject
to
the
payment
of
the
unpaid
portion
of
the
purchase
price.
It
is
true
that
this
purchase
price
was
arrived
at
by
taking
the
actual
value
of
some
of
the
partnership
assets
and
an
estimate
of
the
monetary
value
of
other
of
the
partnership
assets
but
this
was
merely
a
method
of
calculating
a
sale
price.
I
am
therefore
of
the
opinion
that
the
recital
of
the
sum
of
$300,000
as
being
the
fixed
share
of
the
Creditors
in
the
net
profits
of
the
business
for
the
fiscal
year
ending
on
March
31,
1956
is
merely
a
recital
of
how
one
of
the
items
used
to
determine
the
sale
price
was
arrived
at.
It
would
appear
from
three
cases
that
such
a
device
for
the
calculation
of
a
purchase
price
cannot
change
the
fact
that
the
actual
price
calculated
and
paid
was
a
capital
receipt
and
not
receipt
of
income.
In
Glenboig
Union
Fireclay
Co.
v.
C.I.R.,
[1922]
S.C.
(H.L.)
112,
the
House
of
Lords
was
dealing
with
a
transaction
whereby
a
railway
company
paid
to
the
taxpayer
the
sum
of
£15,316
as
compensation
for
their
foregoing
the
right
to
remove
clay
from
certain
of
their
lands
adjacent
to
the
line
of
the
railway
company.
It
was
said
and
not
disputed
that
that
amount
was
assessed
by
considering
that
the
fire
clay
to
which
it
related
could
be
worked
only
for
some
two
and
a
half
years
before
it
would
be
exhausted
and
that
the
amount
represented
the
actual
profit
for
two
and
a
half
years
had
the
fire
clay
been
worked,
which
was,
under
the
agreement,
received
in
one
lump
sum,
and
that
therefore
the
amount
should
be
treated
as
profits.
Lord
Buckmaster
said,
at
p.
119:
It
is
unsound
to
consider
the
fact
that
the
measure
adopted
for
the
purpose
of
seeing
what
the
amount
should
be
was
based
on
considering
what
were
the
profits
that
would
have
been
earned.
That
no
doubt
is
a
perfectly
exact
and
accurate
way
of
determining
the
compensation,
for
it
is
now
well
settled
that
the
compensation
payable
in
such
circumstances
is
the
full
value
of
the
minerals
that
are
to
be
left
unworked,
less
the
cost
of
working,
and
that
is
of
course
the
profit
that
would
be
obtained
were
they
in
fact
worked.
But
there
is
no
relation
between
the
measure
that
is
used
for
the
purpose
of
calculating
a
particular
result
and
the
quality
of
the
figure
that
is
arrived
at
by
means
of
the
test.
I
am
unable
to
regard
this
sum
of
money
as
anything
but
capital
money,
and
I
think
therefore
it
was
erroneously
entered
in
the
balance-sheet
ending
31st
August
1913
as
a
profit
on
the
part
of
the
Fireclay
Company.”
It
is
true
that
decision
dealt
with
the
foregoing
of
profits
which
were
to
be
earned
in
the
future
by
a
lump
sum
payment
while
the
present
case
deals
with
foregoing
profits
which
were
payable
in
the
future
although
jointly
earned
in
the
past.
But
again
I
stress
that
on
February
1st,
1956,
neither
the
respondent
nor
any
of
his
felow
Creditors
were
entitled
to
any
profits
and
that
the
$300,000.
was
only
an
estimate
of
what
had
been
earned
during
the
past
10
months
and
would
have
been
earned
during
the
following
three
months.
Rutherford
v.
C.I.R.
(1926),
10
T.C.
683,
dealt
with
the
situation
where
on
October
31,
1921,
one
partner
who
had
been
entitled
to
18/
64ths
of
the
profits
of
a
partnership
retired
and
on
December
7,
1921,
by
agreement
it
was
provided
that
the
retiring
partner
should
receive
£1,500
‘‘in
full
settlement
of
his
whole
share
and
interest
in
the
profits
of
the
firm
for
the
year
ending
the
31st
of
December
1921”
and
further
decreasing
amounts
in
subsequent
years.
The
remaining
partner
who
up
to
October
31,
1921
was
entitled
to
36/
64ths
of
the
profits
attempted
to
take
the
sum
of
$1,500
which
was
payable
to
the
retiring
person
from
the
firm’s
profits
before
his
own
share
was
calculated
for
eaxation.
The
learned
President,
Clyde,
said
at
p.
692:
“The
sum
of
£1,500
was
made
payable
to
the
retiring
partner
independently
of
what
might
turn
out
to
be
the
profits
actually
made
in
the
current
year,
either
as
a
whole,
or
during
that
part
of
it
which
preceded
the
date
of
dissolution.
It
was
nothing
but
the
consideration
in
respect
of
which
the
retiring
partner
gave
up
any
right
he
might
have
had
in
the
profits
made
in
that
part
of
the
year;
and
it
would
have
remained
a
debt
due
to
him
by
the
remaining
partners,
personally,
even
if
no
profits
at
all
had
been
shown
on
a
balance
struck
by
the
remaining
partners—whether
at
the
date
of
dissolution
or
at
the
end
of
the
current
year.’’
And
at
p.
693:
“
(2)
the
sum
of
£1,500
was
not
a
share
of
those
profits
but
the
price
or
consideration
paid
by
the
remaining
partners
for
a
discharge
on
the
part
of
the
retiring
partner
to
participate
in
them.
’
’
Lord
Blackburn
said
at
p.
697
:
“The
fair
construction
of
the
agreement
does
not
appear
to
me
to
provide
any
justification
for
treating
this
sum
as
a
charge
upon
the
profits.
In
my
opinion,
it
must
be
regarded
as
a
price
paid
to
the
retiring
partner
for
his
share
in
the
profits
and
a
sum
for
which
the
remaining
partners
remained
liable
irrespective
altogether
of
what
the
profits
of
the
firm
for
the
year
might
prove
to
amount
to.”
It
may
be
noted
that
that
decision
dealt
only
with
payment
for
an
agreement
to
forego
a
share
of
profits
to
which
the
taxpayer
would
become
entitled
in
the
future,
such
profits
having
been
earned
in
the
past,
while
in
the
present
case,
the
sum
of
$550,000
payable
to
the
Creditors
was
for
the
discharge
of
not
only
the
Creditors’
rights
to
the
profits
which
would,
on
March
31,
1956,
be
determined
as
having
been
earned
in
the
fiscal
year
at
that
time,
but
to
release
all
of
the
Creditors’
other
claims
to
partnership
assets,
and
the
$300,000
(item
(d))
was
merely
one
of
the
items
included
in
the
calculation
to
arrive
at
the
said
sum
of
$550,000.
I
am
of
the
opinion,
therefore,
that
the
facts
in
the
present
case
are
more
favourable
to
the
contention
of
the
respondent
than
were
those
in
Rutherford
v.
G.I.R.
In
Van
den
Berghs,
Ltd.
v.
Clark,
[1935]
A.C.
431,
the
House
of
Lords
considered
a
payment
of
£450,000
by
a
Dutch
company
to
an
English
company
made
in
the
year
1927,
to
settle
the
claim
of
the
English
company,
the
appellant
for
a
share
in
the
profits
of
the
Dutch
company
during
the
First
War
and
for
the
release
of
their
right
to
a
share
in
the
profits
which
might
be
earned
by
the
Dutch
company
in
the
years
following
and
up
to
1940.
The
English
company
had
been,
entitled
to
those
shares
of
profits
up
to
the
year
1940
under
a
series
of
agreements
between
the
two
companies.
The
appellant
had,
in
calculating
the
amount
it
should
claim
in
the
arbitration
to
fix
the
amount
due
between
the
companies,
worked
out
a
sum
of
£449,042
which
it
alleged
the
Dutch
company
owed
them
already.
The
special
commissioners
held
that
the
£450,000
was
paid
in
respect
of
the
pooling
agreements
and
must
be
brought
in
for
the
purpose
of
arriving
at
the
balance
of
the
profits
and
gains
of
the
appellant
for
the
year
ending
December
31,
1927.
Lord
Macmillan
said,
at
p.
442
:
“But
even
if
payment
is
measured
by
annual
receipts,
it
is
not
necessarily
itself
an
item
of
income.
As
Lord
Buckmaster
pointed
out
in
the
case
of
the
Glenboig
Union
Fireclay
Co.
v.
Commissioners
of
Inland
Revenue,
1922
8.C.
(H.L.)
112,
115,
‘There
is
no
relation
between
the
measure
that
is
used
for
the
purpose
of
calculating
a
particular
result
and
the
quality
of
the
figure
that
is
arrived
at
by
means
of
the
test.
,,,
If
the
arrangement
arrived
at
by
virtue
of
the
agreement
of
February
1,
1956
(Ex.
3)
is,
as
I
have
found
it
to
be,
a
sale
of
partnership
assets
by
the
various
partners
to
the
continuing
partner
and
included
in
those
assets
the
right
of
the
retiring
partners
to
share
in
any
profits
of
the
partnership,
either
those
which
would
be
earned
before
the
agreement
or
those
which
would
be
earned
thereafter,
then
I
am
of
the
opinion
that
the
authorities
quoted
require
the
sale
price
to
be
considered
as
a
capital
receipt,
and
I
am
of
the
opinion
that
if,
when
the
sale
price
was
calculated
by
including
as
part
thereof
an
estimate
of
the
already
earned
but
undistributed
profits,
the
same
result
applies.
Counsel
for
the
Minister
cited
in
reply
the
Commissioner
of
Taxation
v.
Melrose,
a
decision
of
the
Supreme
Court
of
Western
Australia
reported
in
26
W.A.L.R.
at
p.
22.
That
was
an
appeal
from
the
decision
of
a
magistrate
of
the
Court
of
Review.
Melrose
was
the
owner
of
4/7ths
shares
in
a
partnership
operating
a
very
large
agricultural
enterprise.
The
partnership
agreement
provided
for
the
division
of
profits
on
June
30th
annually.
On
June
24,
1920,
Melrose
delivered
1/4th
of
his
interest
to
each
of
three
members
of
his
family
and
then
attempted
to
resist
the
claim
of
the
Commissioner
of
Taxation
for
tax
on
the
profits
which
w
ould
be
payable
upon
those
3/7
ths
interest.
McMillan,
C.
J.
said,
at
p.
29
:
‘
‘
It
seems
to
me
that
it
is
a
very
clear
case.
During
the
year
in
question
considerable
profits
accrued,
to
which,
when
they
had
been
ascertained,
the
present
respondent
would
have
been
entitled.
Those
were
the
profits
which
he
would
have
got
from
the
business.
But
a
few
days
before
the
time
for
taking
the
accounts
he
handed
over
a
portion
of
his
share
of
the
partnership
profits
to
different
members
of
his
family.
It
seems
to
me
that
if
profits
have
once
accrued,
as
they
did
in
this
case,
although
the
actual
amount
of
them
had
not
been
ascertained,
there
is
taxable
income
upon
which
the
Commissioner
is
entitled
to
require
the
usual
amount
to
be
paid.
The
decision
of
the
Court
does
not
cite
any
authority
nor
is
any
authority
mentioned
in
the
notes
of
the
argument.
The
transfer
of
the
shares
to
members
of
his
family
was
evidently
gratuitious.
I
am
unwilling
to
accept
this
decision
in
view
of
the
decision
of
the
House
of
Lords
in
Rutherford
v.
C.I.R.,
and
Van
den
Berghs
Ltd.
v.
Clark,
supra.
In
my
view,
Mr.
Purcell
and
the
Creditors,
1.e.,
his
former
partners,
made
an
agreement
whereby
Purcell
for
a
price,
bought
the
physical
assets
of
the
partnership,
and
any
rights
which
his
partners
might
have
in
the
future,
whether
that
future
be
near
or
far,
to
obtain
profits
from
the
operation
of
the
partnership
business.
The
purchase
price
was
a
capital
receipt
and
no
part
of
it
should
have
been
included
in
the
respondent’s
income.
I
would
dismiss
the
appeal
with
costs.
Email this Content