Commonwealth-New Guinea Timbers Ltd v Chief of Collecter Taxes [1973] PGSC 9; [1973] PNGLR 388 (24 March 1972)

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[1973] PNGLR 388 - Commonwealth-New Guinea Timbers Limited v The Chief of Collecter Taxes

INCOME TAX - Income derived during year - Test of gains realized or readily realizable - Agreement with Commonwealth - Sums received under agreement - Sums claimed as income under agreement although not received - No legal right to sums under agreement - Established commercial and accounting principles - Sums not deductible as bad debts - Sums not deductible as business losses - Mistake of law - Profit not ascertainable - Amendment of assessment - Income Tax Ordinance, 1959-1970, ss. 85[cdxxi]¹, 68 (1)[cdxxii]², 232 (2), (3) & (4) & 232 (9)[cdxxiii]3.

The plaintiff company was incorporated pursuant to an agreement between the Commonwealth of Australia and Bulolo Dredging Limited (now Placer Development Limited). The agreement approved pursuant to the New Guinea Timber Agreement Act, 1952 provided by clause 14 thereof:

“If customs duty is paid upon the importation into Australia of plywood, veneers, logs and other products of the Timber Company, and is not remitted, the Commonwealth will pay to the Timber Company a subsidy upon the exportation of those products from the Territory for entry into Australia of an amount or at a rate determined by the Commonwealth from time to time, but the amount of subsidy paid shall not exceed the amount of customs duty paid and not remitted.”

Pursuant to clause 14 the Commonwealth paid to the plaintiff in full the amounts of the claims for the years ending 30th June, 1954 to 1959 such payments not being received until after the expiration of the year in respect of which the payments were made, and then failed to make any further payment to the plaintiff. The payment of all customs duty was borne by the plaintiff. Until June, 1968, the plaintiff continued the practice of bringing into account as income a sum equal to the amount which it considered it was entitled to receive under cl. 14, although such sum had not been received from the Commonwealth during those years. It made special provisions in its books of account for these sums, thereby acting in accordance with proper and established accounting and commercial principles. The Chief Collector of Taxes assessed tax on income which included these sums.

In 1969, proceedings instituted by Placer Development Limited in 1963 seeking declarations as to the obligations of the Commonwealth under cl. 14 were brought on in the High Court of Australia and on 29th June, 1969, the High Court delivered judgment, the effect of which was that the Commonwealth was not obliged by cl. 14 to pay a subsidy. Thereupon—the plaintiff wrote off a sum of $1,121,116.00 shown in its books as at 1st July, 1968, as the total sum owing to it by Commonwealth under cl. 14; and an amount of $1,084,030.00 claimed as a deduction in 1969 and again in 1970 was not allowed.

N1>(1) Whether amounts not yet received are derived as income during a particular year depends upon whether they have matured into receivable debts or are sums which the taxpayer has a right to receive, the test being whether they were gains which have come home to the taxpayer in a realized or immediately realizable form.

Squatting Investment Co. Ltd. v. Federal Commissioner of Taxation [1953] HCA 13; (1952-53), 86 C.L.R. 570; J Rowe and Son Pty. Ltd. v. Commissioner of Taxation (1970), 45 A.L.JR. 428; The Commissioner of Taxes (South Australia) v. The Executor Trustee and Agency Co. of South Australia Ltd. (Carden’s case)[1938] HCA 69; , (1958), 63 C.L.R. 108 and Arthur Murray (N.S.W.) Pty. Ltd. v. Federal Commissioner of Taxation [1965] HCA 58; (1965), 114 C.L.R. 314 referred to.

N1>(2) Accordingly as cl. 14 of the Agreement conferred no legal right upon the plaintiff any sums received or claimed under cl. 14 were not part of the plaintiff’s assessable income.

Test in The Commissioner of Taxes (South Australia) v. The Executor Trustee and Agency Co. of South Australia Ltd. (Carden’s case) [1938] HCA 69; (1938), 63 C.L.R. 108 at p. 155 applied.

N1>(3) In looking at the judicial concept of income, established commercial and accounting principles in keeping books are but evidence of the concept; and any assistance which they may provide does not extend to the preparation of income tax returns.

N1>(4) The plaintiff was not entitled to write off the sum of $1,121,116.00 or any part of it as a bad debt pursuant to s. 85 of the Income Tax Ordinance; such sum not being legally enforceable was not a debt.

N1>(5) The plaintiff was not entitled to claim the sum of $1,121,116.00 or any part thereof as a loss incurred in gaining or producing the assessable income pursuant to s. 68 (1) of the Income Tax Ordinance: the sum was never part of the assessable income of the plaintiff and could not therefore be described as a loss under s. 68 (1).

N1>(6) The effect of the High Court judgment in 1969 was that the plaintiff had wrongly construed the agreement with the Commonwealth as giving a right to a subsidy when none existed—such being a mistake of law the plaintiff was not entitled to have the assessments amended under s. 232 (4) of the Income Tax Ordinance.

N1>(7) As it had not been shown that the profit for any year was not ascertainable at the end of that particular year, the plaintiff was not entitled to have any assessments amended under s. 232 (9) of the Income Tax Ordinance.

In an action by the plaintiff (Commonwealth-New Guinea Timbers Limited) against the defendant (The Chief Collector of Taxes) relating to income tax assessments for the years ending 30th June, 1962 to 1968 the defendant demurred to the plaintiff’s statement of claim.

The plaintiff had also lodged objections to assessments of income tax for the years ending 30th June, 1961, 1969 and 1970 under the Income Tax Ordinance, 1959-1970, which pursuant to s. 247 of that Ordinance were to be treated as appeals. An order was made for both proceedings to be argued before the Full Court. Relevant facts and submissions of counsel appear in the reasons for judgment of the Court.

FROST SPJ CLARKSON KELLY JJ: This Court has before it a demurrer by the defendant to the plaintiff’s statement of claim which relates to assessments for the year ending 30th June, in each of the years 1962 to 1968 and also objections by the plaintiff in respect of assessments for the year ending 30th June, in each of the years 1961, 1969 and 1970, under the Income Tax Ordinance 1959-1970, which are to be treated under s. 247 as appeals against the decision by the Chief Collector disallowing the objections. An order was made for these proceedings to be argued before the Full Court. For the purpose of the appeals the parties have agreed that this Court should accept the facts set out in the statement of claim.

The plaintiff company was incorporated pursuant to an agreement made between the Commonwealth and Bulolo Gold Dredging Limited to which Placer Development Limited is the successor. The agreement was approved pursuant to the New Guinea Timber Agreement Act, 1952 of the Commonwealth Parliament and is set out in the schedule to that statute. The share capital was held as to one half thereof, less one, by Placer Development Limited, and as to the other half, plus one, by the Commonwealth of Australia, which thus had the majority interest. The provision in the agreement directly relevant to the demurrer and the appeals is cl. 14 which is as follows:

“If customs duty is paid upon the importation into Australia of the plywood, veneers, logs and other products of the Timber Company, and is not remitted, the Commonwealth will pay to the Timber Company a subsidy upon the exportation of those products from the Territory for entry into Australia of an amount or at a rate determined by the Commonwealth from time to time, but the amount of subsidy paid shall not exceed the amount of customs duty paid and not remitted.”

Clause 5 provided that the assurance of the supply to the Australian market of plywood and other products similar to those of the plaintiff (in the agreement called the “Timber Company”) was fundamental to the agreement. Under s. 10 was provided that subject to the legislation in force in the Territory of New Guinea, the Commonwealth would take all necessary steps and do all in its power to ensure the grant to the plaintiff company of a permit under the Forestry Ordinance, 1936-1951, and the Forestry Regulations of the Territory of New Guinea, conferring upon the plaintiff the exclusive right to cut and remove over a period of ten years a stated quantity of various timbers. Under cl. 12 of the Agreement it was provided that on the expiration of the permit the Commonwealth would upon the same terms endeavour to ensure the grant to the plaintiff of a renewal of the permit for a further period of ten years. Thus it was within the contemplation of the parties that the company to be formed under the agreement should carry on business for a period certainly of ten years, with provision for an extension of the period for a further ten years, and that over the periods referred to there would be ensured a supply to the Australian market of the products of the plaintiff company.

After its incorporation the plaintiff began to carry on business and as from January, 1954, to produce plywood and other timber products, some of which were sold for import into Australia and sale upon the Australian market. Upon such importation of some of the plywood Australian customs duty was paid and the duty was not remitted. Claims were then made by the plaintiff upon the Commonwealth year by year until 1969 for payments in pursuance of cl. 14 of the said Agreement in respect of the amount of such duty which had been paid during the preceding year and not remitted. The Commonwealth, pursuant to cl. 14 of the Agreement, paid to the plaintiff in full the amounts of such claims in respect of the years ending on 30th June in the years 1954, 1955, 1956 and 1957, and in September 1960 paid to the plaintiff the amount of £140,000 ($280,000) in respect of the years ended 30th June, 1958, and 30th June, 1959. The Commonwealth then failed to make any further payment to the plaintiff.

All of the Australian customs duty so paid, was paid to the Commonwealth by the purchasers from the plaintiff of the plywood in question. The amount of such duty was borne by the plaintiff, either by refunding to the purchaser the amount of the duty so paid by the purchaser or by reducing the amount charged for the plywood by an amount equivalent to the duty.

In 1963 Placer Development Limited instituted proceedings in the High Court of Australia against the Commonwealth seeking certain declarations as to the obligations of the Commonwealth under cl. 14 of the said Agreement. In fact the proceedings were not brought on before the High Court until 1969.

However, in the meantime, until 30th June, 1968, the plaintiff continued the practice which it had commenced for the year ended 30th June, 1955, and brought to account as income a sum equal to the amount which the plaintiff considered it was entitled to receive from the Commonwealth of Australia under cl. 14 of the Agreement in respect of customs duty paid and not remitted on goods said to have been shipped by the plaintiff during that year, although such sum had not been received from the Commonwealth during that year. In fact it appears that the amount which was thus brought to account was probably the full amount of the customs duty paid and not remitted. In respect of each of the years ended 30th June, 1958, to 30th June, 1968, inclusive, the plaintiff made a special provision in its books out of the income derived by it in respect of an amount equal to the amount which the plaintiff considered it was entitled to receive from the Commonwealth under cl. 14. One of the agreed facts upon which the plaintiff strongly relied was that in bringing to account as income of the said years the amounts which the plaintiff considered were due to it from the Commonwealth of Australia as a result of the sales made by it during the relevant years and in making the special provisions the plaintiff acted in accordance with proper and established accounting and commercial principles. It appears also from the agreed facts that any sum received under cl. 14 in respect of the customs duty paid in any one financial year prior to the last payment in September, 1960, was not received until after the expiration of that year.

Income tax first became payable under the Income Tax Ordinance in respect of the year ended 30th June, 1960. In respect of that year and of the financial years to 30th June, 1968, inclusive, the plaintiff brought to account as assessable income the sum which it had brought to account in its own accounts as income of that year, again although such sum had not been received during that year. Actually there was some difference between the sums brought to account for income tax purposes and the sums claimed from the Commonwealth which it is said was attributable to the fact, as agreed, that certain goods had been shipped but were still on the water and payment of customs duty in respect of those goods had not been made as at 30th June, in the year in question.

In the plaintiff’s assessment for the year ending 30th June, 1960, there was included in its assessable income the amount of £136,422 ($272,844) which was brought to account as assessable income in the return lodged by it for that year. However, by an amended assessment dated 13th August, 1962, (i.e. prior to the institution of proceedings in the High Court) that amount was excluded from the assessable income.

The reason for this amended assessment becomes clear because of the action taken by the Chief Collector in respect of the assessment based on the income derived by the plaintiff during the year of income ended 30th June, 1961, the amended assessment for which year is the first assessment objected to. In the original assessment for that year there was included in the assessable income of the plaintiff the amount of £51,159 ($102,318) which was brought to account as assessable income in the plaintiff’s return as the sum due to the plaintiff from the Commonwealth under cl. 14. However, by an amended assessment dated the same day as the amended assessment in respect of the year of income ended 30th June, 1960, there was excluded from the assessable income of the plaintiff the aforementioned sum and there was included in the assessable income £140,000 ($280,000) which was the amount actually received by the plaintiff from the Commonwealth during the year of income, and referable to claims made in respect of the years ended 30th June, 1958, and 30th June, 1959. However, despite the amended assessment the plaintiff continued to include in its returns of assessable income for subsequent years the amounts which had been brought into account in its books, with adjustments for goods shipped and on the water but in respect of which customs duty had not been paid, and in respect of each of the years from 30th June, 1962, to 30th June, 1968, inclusive, the Chief Collector assessed tax on an income which included those sums.

On 27th June, 1969, the High Court delivered its judgment, and the effect of the answers which by a majority it gave to the declaration sought was that the Commonwealth was not obliged by cl. 14 to pay a subsidy.

Following this decision the plaintiff made an entry in its books of account, at a time which was after 30th June, 1969, but in respect of the year ended 30th June, 1969, whereby it wrote off an amount of $1,121,116, shown in its books as at 1st July, 1968, as the total sum owing to it by the Commonwealth of Australia under cl. 14, the plaintiff regarding the amount as being irrecoverable. In its income tax return for that year the plaintiff claimed as a deduction $1,084,030, part of that amount, which was calculated as a total of the amounts brought to account as assessable income for the years ended 30th June, 1960 to 30th June, 1968, inclusive. However, in the assessment for that year the amount so claimed was not allowed as a deduction. In the plaintiff’s income tax return for the year ended 30th June, 1970, the same sum of $1,084,030 was again claimed as a deduction but was again not allowed.

The objections before this Court as appeals thus relate to the inclusion by the Chief Collector in the plaintiff’s assessable income for the year ended 30th June, 1961, of the amount of $280,000 being the amount paid by the Commonwealth in September, 1960, and to the disallowance as a deduction of the amount of $1,084,030 in respect of the assessments made for the years ended 30th June, 1969, and 30th June, 1970.

The demurrer proceedings relate to the declaration sought by the plaintiff that it is competent for the Chief Collector to consider and determine according to law a request made by the plaintiff that the Chief Collector amend the assessments issued in respect of the income derived by the plaintiff during each of the years of income ended 30th June, 1962 to 30th June, 1968, by reducing the taxable income for each such year by the amounts respectively included in the assessable income of the plaintiff, as the amounts alleged to be due to it by the Commonwealth under cl. 14.

At the outset it is necessary to refer to the High Court’s judgment in Placer Development Limited v. The Commonwealth of Australia[cdxxiv]⁴. It is to be noted that the plaintiff’s principal contention, the substance of which was that cl. 14 required the Commonwealth when customs duty was paid upon the importation of the timber company’s products into Australia, and that duty was not remitted, to pay a subsidy equal to the duty so paid and not remitted, was rejected unanimously. It was only as to the final question asked whether the Commonwealth was obliged by the terms of the agreement to pay the plaintiff a subsidy, that there was dissent, the majority holding that cl. 14 did not create any contractual obligation.

Turning first to the assessment for the year ending 30th June, 1961, counsel for the plaintiff, as his main contention, put forward the following propositions: a company carrying on business properly brings to account as income all the proceeds of its business which according to established accounting and commercial principles are treated as income in that particular year; the amounts which the company claimed from the Commonwealth for the years ending 30th June, 1958, and 30th June, 1959, would, if recovered, have been the proceeds of the company’s business for this purpose, and to bring to account the amounts so claimed as income for those years was in accordance with established commercial and accounting principles, as was conceded by agreement. Counsel further submitted that no provision of the Ordinance required those amounts to be treated otherwise. It therefore followed, counsel submitted, that the sum of $280,000 which was paid in respect of those claims was not income derived in the year of receipt. If the plaintiff’s contention is correct, no tax is payable upon this sum as during the years when the plaintiff contends it was derived, income tax was not payable in the Territory.

Counsel relied mainly upon J Rowe & Son Pty. Ltd. v. Commissioner of Taxation[cdxxv]⁵, and particularly upon the exposition by Dixon J (as he then was) in The Commissioner of Taxes (South Australia) v. The Executor Trustee and Agency Company of South Australia Limited (Carden’s case)[cdxxvi]⁶and upon Arthur Murray (N.S.W.) Pty. Ltd. v. Federal Commissioner of Taxation[cdxxvii]⁷.

Counsel for the defendant submitted that upon principle income can only be said to be derived if the taxpayer either had earned the sums in question or received them during the year of income, and, as it was decided by the High Court in Placer Development Limited v. The Commonwealth of Australia[cdxxviii]⁸ that the plaintiff had no right to a subsidy under cl. 14, it followed that income could not be said to be derived by the plaintiff under cl. 14 in any year until the hope or expectation it had that it would receive sums thereunder was fulfilled and payment received.

Having regard to the absence of any legal entitlement in the plaintiff to moneys under cl. 14 the plaintiff’s contention goes beyond all the decided cases. Where the earnings basis rather than receipts is applicable for the computation of income, as in the case of a trading company, Dixon J in Carden’s case[cdxxix]⁹ accepted that a distinction is to be drawn between trading and other sources of income. The passage from the work Law of Income Tax by Sir Houldsworth Shaw and Mr. Baker, cited by Dixon J states that it is in respect of trading debts due that sums unpaid are included in income. The passage continues, “With regard, however, to other income there must be something ‘coming in’; that is, for income tax purposes, receivability without receipt is nothing”.

J Rowe & Son Pty. Ltd. v. Commissioner of Taxation[cdxxx]¹⁰ exemplifies this principle, which Menzies J applied in holding that, in the case of a trading company, income from the sale of stock is derived when the stock is sold and a debt is created. In Henderson v. Federal Commissioner of Taxation[cdxxxi]¹¹ where the Court held that the proper basis for the taxation of the income of an accountancy practice conducted in partnership was upon an earnings basis, Barwick C.J, with whom McTiernan J and Menzies J agreed, said at p. 650, “In ascertaining such earnings, only fees which have matured into recoverable debts should be included as earnings. In presenting figures before his Honour allowance was made for what was termed ‘work in progress’. But this, in my opinion, is an entirely inappropriate concept in relation to the performance of such professional services as are accorded in an accountancy practice when ascertaining the income derived by the person or persons performing the work. When the service is so far performed that according to the agreement of the parties or in default thereof, according to the general law, a fee or fees have been earned it or they will be income derived in the period of time in which it or they have become recoverable.”

In The Squatting Investment Co. Ltd. v. Federal Commissioner of Taxation[cdxxxii]¹² the High Court was concerned whether amounts paid by the Australian Wool Realisation Commission in pursuance of the Wool Realization (Distribution of Profits) Act 1948, became part of the assessable income of the appellant and whether such amounts should be included in the assessable income of the year of receipt or in earlier years during which the relevant wool had been supplied for appraisement. The judgments of Fullagar and Kitto JJ, the minority in the High Court, that the sums in question formed part of the assessable income of the appellant, were upheld on appeal to the Privy Council. Dealing with the question as to the year of income in which the sums were derived as income, Fullagar J said, at pp. 626-7:

“I think this question is also covered by Ritchie’s case ((1951) 84 C.L.R., at pp. 583-584). The ‘criterion by which the question of beneficial right must be tested is to be found in the conceptions governing the ascertainment of the income of a pastoral business for a given year’. There was no right to receive this sum or any sum. It could not properly be brought into the profit and loss account until it was received. There is no justification for any re-opening of past profit and loss accounts. For all purposes, including taxation purposes, it seems to me that it is ‘derived’ in the year in which it is received.”

Kitto J held that it was not possible to attribute the money received to any earlier year, “for under the provisions of the Income Tax Assessment Act which govern this case the inclusion of an amount in the assessable income of a year depends upon its having been derived in that year. There is no ground upon which the moneys in question here can be considered to have been derived in any year earlier than that in which the appellant received them.” (at p. 638).

When the case went to the Judicial Committee of the Privy Council, counsel for the taxpayer conceded that, assuming the amounts involved were assessable income, they were derived in the year of receipt (Taxation Commissioner of Australia v. Squatting Investment Co. Ltd.[cdxxxiii]¹³.) In its reasons for judgment the Judicial Committee noted at p. 215 that counsel for the respondent “did not seek to contend that, if the payment was assessable, it could be attributed to any year other than the year ending December 31st, 1949”. (i.e. the year of receipt).

As in the Australian Act the Territory Ordinance provides that income tax is imposed upon the taxable income derived during the year of income (s. 11), and the assessable income of the taxpayer includes, where the taxpayer is a resident, as in this case, the gross income derived directly or indirectly from all sources whether in or out of the Territory (s. 1 (a)).

It follows from the cases referred to that whether amounts not yet received are derived as income during a particular year depends upon whether they have matured into recoverable debts or are sums which the taxpayer has a right to receive. The plaintiff was thus driven to contend that, if upon established commercial and accounting principles the sum in question is properly brought to account as income derived during the relevant year (as it claimed is agreed here) that consideration is conclusive even although the taxpayer has in the year of income no right to receive that sum.

For this proposition reliance was placed upon Arthur Murray (N.S.W.) Pty. Ltd. v. Federal Commissioner of Taxation[cdxxxiv]¹⁴. In that case the taxpayer received fees for specified dancing lessons to be given over future periods. These were placed in a suspense account until the lessons in respect of which they were paid had been given, when the taxpayer transferred them to its revenue account. It was held by the High Court that the fees received in advance of tuition could not at the moment before their receipt be regarded as assessable income of the taxpayer. The question was whether the fees received in advance for tuition were taxable as assessable income during the year of receipt, or whether such sums became taxable only as and when earned by the giving of lessons.

The Court pointed out[cdxxxv]¹⁵ that the problem was the converse of that considered in Carden’s case (supra) where it was held that a doctor’s fees earned but not received did not make income; it was whether in the circumstances, it might “properly be held that receipt without earning makes income” (op. cit. at p. 317). An enquiry as to standard accountancy methods in relation to the matter was not enough of itself to determine the question of what was income, as to which bookkeeping methods were evidential only.

From the judgment it is clear that the Court was considering the question whether there was a derivation of income from either “an earning” or a receipt of a sum owed or owing in the course of the taxpayer’s business. In the present case however there is no such earning or receipt or debt created.

The High Court then went on to consider the accounting method adopted by the taxpayer in the light of the facts that its obligation to give lessons was to be discharged over a period which might continue for years after the year of receipt of the fees, and such fees were subject to the contingency that the whole or part might have to be repaid, and held that whilst commercial and accountancy practice could not be substituted for any test laid down by the Act to determine the year when such fees were derived as income, no such test was in fact laid down, so that it was proper to have regard to that practice to determine the question.

The part of the judgment upon which counsel for the plaintiff based his argument is as follows (at p. 320):

“In so far as the Act lays down a test for the inclusion of particular kinds of receipts in assessable income it is likewise true that commercial and accountancy practice cannot be substituted for the test. But the Act lays down no test for such a case as the present. The word ‘income’, being used without relevant definition, is left to be understood in the sense which it has in the vocabulary of business affairs. To apply the concept which the word in that sense expresses is not to substitute some other test for the one prescribed in the Act; it is to give effect to the Act as it stands. Nothing in the Act is contradicted or ignored when a receipt of money as a prepayment under a contract for future services is said not to constitute by itself a derivation of assessable income. On the contrary, if the statement accords with ordinary business concepts in the community—and we are bound by the case stated to accept that it does—it applies the provisions of the Act according to their true meaning.”

Counsel then submitted that the Ordinance lays down no test for such a case as the present so that it was proper to have regard to the agreed accountancy practice, and thus treat each sum claimed by the plaintiff under cl. 14 as income derived during the year of income in respect of which it was claimed. But the judgment makes it clear that the Court was concerned with moneys prepaid under a contract for services not yet rendered. The Arthur Murray case[cdxxxvi]¹⁶ is not authority for the proposition that sums, which upon “the judicial understanding” of the meaning of income cannot be said to have been derived in a particular year of income, can be converted into income for that year merely because it is agreed that according to commercial and accounting practice that they should be so regarded, when, as is the case here, those sums have not been earned or received. In our opinion, the passage last cited is not to be taken to detract from the earlier statement in the judgment that so far as the concept of income is concerned, “book-keeping methods are but evidence of the concept” (at p. 318). Upon the decisions of the High Court the test is whether the sums claimed under cl. 14 were gains “which had come home to the taxpayer in a realized or immediately realizable form” (Carden’s case[cdxxxvii]¹⁷) and in our opinion, as cl. 14 conferred no legal right upon the plaintiff, such sums had not “come home” before payment.

There is a further ground for rejecting the Company’s argument on this aspect of the case. Any assistance the Company may receive from showing that it followed established accountancy and commercial principles in keeping its books does not in our view extend to the preparation of its income tax return. In the Company’s books, when the amount of a claim against the Commonwealth was brought in as a credit it was offset by debiting the provision against it. The result is that the amounts or credits available for payment of dividends, for instance, contain no part of any claim against the Commonwealth.

For example, in the 1962 accounts the general profit and loss account shows a profit of £201,235 from which is deducted the provision against the claim for that year £29,605 described as a special reserve leaving a balance of £171,631 which is then transferred to the profit and loss appropriation account. This we can understand is in accordance with the principles referred to.

Thereafter, however, the Company in preparing its income tax return for that year prepared a “statement of taxable income” which commences by showing the year’s net profit (£171,631) and then goes on to add a number of other items including the £29,605 from a special reserve.

The agreed statement in par. 7 of the statement of claim to the effect that in bringing a claim to account and in making a corresponding provision the Company acted in accordance with proper and established accounting and commercial principles is correct in relation to the keeping of the Company’s books but in our view has no application to and therefore cannot justify the subsequent action of preparing a statement of taxable income for the purpose of making a return and in it adding to the annual net profit the amount of the claim against the Commonwealth.

The plaintiff did not at the hearing abandon the ground taken as an objection in respect of the year ending 30th June, 1961, that s. 232 (2) or (3) did not justify the amended assessment. As it has been held upon the corresponding Australian provision (s. 170) that the burden rests on the taxpayer of proving to the reasonable satisfaction of the court the particular fact or facts which take the case outside the section, (McAndrew v. Federal Commissioner of Taxation)[cdxxxviii]¹⁸ and as the matter was not argued, we do not deal with this ground.

It was also argued, although perhaps not strongly, that the sum of $280,000 was improperly included as part of the plaintiff’s assessable income because it was of a capital nature. As this sum was part of the profits from the carrying on of the plaintiff’s business it will be seen that this submission was difficult to maintain. The appellant’s contention was that the payment did not fall within the relevant provision of s. 47 (1) which provides that the assessable income of a taxpayer shall include: “ (g) any bounty or subsidy received in or in relation to the carrying on of a business (which bounty or subsidy shall be deemed to be part of the proceeds of that business).” It was argued that the word “subsidy” as used in the Ordinance could not appropriately be applied to the payment in question. However, whilst the use of that word in cl. 14 is not conclusive, it carries great weight as the agreement was adopted by the 1952 Act. Further the payments contemplated in cl. 14 fall, in our opinion, within the definition of the term “subsidy” adopted by Windeyer J in Placer Development Limited v. The Commonwealth of Australia (supra)[cdxxxix]¹⁹, as a “legislative grant of money in aid of a private enterprise deemed to promote the public welfare”, which appears in the Cyclopedic Law Dictionary by Shumaker & Longsdorf. Counsel for the plaintiff did not dispute that money paid under cl. 14 was received in relation to the carrying on of a business; counsel’s contention was based on the following passage from the judgment of McTiernan and Williams JJ in The Squatting Investment case[cdxl]²⁰: “There remains the question whether the £22,851 was a bounty or subsidy received in or in relation to the carrying on of a business within the meaning of s. 26 (g) of the Income Tax Assessment Act. That paragraph provides that such bounty or subsidy shall be deemed to be part of the proceeds of that business. In our opinion, this provision has no application to the present facts. The payments to which it refers are payments made for the purpose of assisting persons to carry on a business at the time the payments are made or, perhaps, to commence a business in the future. The appellant was, in fact, still carrying on a business of growing and selling wool in November, 1949. But it might not have been doing so. It might then have finally ceased to carry on business. Many suppliers who qualify for payments under Pt. III of the Wool Realization (Distribution of Profits) Act may have ceased to carry on business and the Act, as we have said, contains special provisions relating to suppliers who have died etc. Distributions under the Act cannot be bounties or subsidies within the meaning of par. (g) in some cases and not in others. The distributions relate to business operations past and closed, not to current operations. They are not bounties or subsidies within the meaning of the paragraph.”

It was then argued that as the business of the plaintiff might at any time come to an end it was consistent with the facts that a payment made by the Commonwealth under cl. 14 might in fact turn out to have been made at a time when the plaintiff had ceased to carry on business and thus fall outside s. 47 (1) (g). But in The Squatting Investment case[cdxli]²¹ those learned Justices were concerned to consider the Wool Realization (Distribution of Profits) Act in its application to a large number of pastoral businesses in relation to payments for wool delivered some years beforehand. Those facts make the present case distinguishable, for under the agreement it was clearly contemplated that the business would continue for at least the period of the first permit of ten years, that is, at the earliest from the date of the incorporation of the company in 1952, which would include the year ending 30th June, 1961, and by that means there would be assured the supply to the Australian market of plywood and other products. For these reasons, in our opinion, the plaintiff’s contention that the payment was of a capital nature fails.

It was the defendant’s alternative submission that the word “received” in s. 47 (1) (g) means actual receipt, so that upon the express terms of that section the payment of $280,000 was properly part of the plaintiff’s assessable income for the year in which it was paid. Thus Dr. Hannan in his textbook Principles of Income Taxation (1946) states at p. 174: “Income tax statutes usually operate in respect of yearly periods, and the income to be assessed is spoken of as ‘derived’ or ‘arising’ or ‘accruing’. The word ‘received’ is generally avoided, perhaps because it suggests the actual handling of income.” Whilst we consider that there is much to be said for this submission in its application to the present facts we do not find it necessary to decide the matter.

In our opinion the appeal in relation to the assessment for the year ended 30th June, 1961, fails.

Upon the appeal in respect of the assessment for the year ending 30th June, 1969, the first question is whether the plaintiff was entitled to write off the sum of $1,121,116 or any part of it as a bad debt pursuant to s. 85 of the Income Tax Ordinance. The relevant portion of that section is as follows:

N2>“(1) Debts that are bad debts and are written off as such during the year of income and:

(a) have been brought to account by the taxpayer as assessable income of any year; ... are allowable deductions, but no other bad debts are allowable deductions.”

The words underlined do not appear in the corresponding Australian section (s. 63), but for the purposes of deciding the applicability of the section in the present context the additional words may be put aside. In a number of recent cases in the High Court the meaning of the words “debts that are bad debts” has been considered. See Kratzmann v. Commissioner of Taxation[cdxlii]²²; Franklin’s Selfserve Pty. Limited v. Commissioner of Taxation[cdxliii]²³; and G. E. Crane Sales Pty. Ltd. v. Commissioner of Taxation[cdxliv]²⁴. In the latter case it was held by the Full Court that “debts” in s. 63 (1) must be construed as referring to existing debts and cannot apply to a sum the right to recover which has been extinguished by voluntary act of the creditor who beneficially owned it. Counsel for the appellant faced with the decision of the High Court that sums claimed under cl. 14 are not legally enforceable, and therefore not debts, sought to distinguish Crane’s case[cdxlv]²⁵ on the ground that the High Court was not there dealing with sums which had at no time become the subject of a legal obligation. However, we can see no good reason for so reading down Crane’s case[cdxlvi]²⁶. We think it clear from what Menzies J (with whom Barwick C.J and McTiernan J agreed) said that if what is claimed as a debt had never been a debt owing to the taxpayer, the amount could not have been claimed as a deduction under s. 63.

The question whether the actual writing off in September 1969 constituted a writing off for the purposes of the section therefore does not arise. See Point v. Federal Commissioner of Taxation[cdxlvii]²⁷.

It was next argued that if no part of the sums brought to account as assessable income as due to the plaintiff under cl. 14 could be written off as bad debts, in respect of the year ending 30th June, 1969, such sums were allowable deductions under s. 68 (1) of the Ordinance. (This is the corresponding section to s. 51 (1) of the Australian Act. The substitution of the term “that income” for “such income” in the Australian section would seem to be immaterial). Section 68 (1) is as follows:

“All losses and outgoings, to the extent to which they are incurred in gaining or producing the assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing that income, are allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.”

There is a preliminary question as to the effect of the words in s. 85 (1)—”but no other bad debts are allowable deductions”. In our opinion those words would not prevent the sums in question being allowable deductions if such sums were not debts within the meaning of s. 85, but otherwise came within s. 68 (1).

As we understood the plaintiff’s contention it was that upon the decision of the High Court in 1969, the sums previously brought to account as claimed under cl. 14, and debited against the Commonwealth, as an asset in the plaintiff’s books of account, became losses, as upon that date they ceased to be recoverable. But this argument misconceives the declaratory effect of the High Court’s judgment which brought about no change in legal relationship.

Dixon C.J explained the expression “losses and outgoings incurred” in the context of the corresponding Australian section, as follows: “... they do not admit of the deduction of charges unless, in the course of gaining or producing the assessable income or carrying on the business, the taxpayer has completely subjected himself to them. It may be going too far to say that he must have come under an immediate obligation enforceable at law whether payable presently or at a future time. It is probably going too far to say that the obligation must be indefeasible. But it is certainly true that it is not a matter depending upon ‘proper commercial and accountancy practice rather than jurisprudence’. Commercial and accountancy practice may assist in ascertaining the true nature and incidence of the item as a step towards determining whether it answers the test laid down by s. 51 (1) but it cannot be substituted for the test.” Federal Commissioner of Taxation v. James Flood Pty. Ltd.[cdxlviii]²⁸.

This passage indicates that whether a deduction claimed as a loss or outgoing falls within s. 68 (1) depends upon the application of the legal principles so defined. On the agreed facts all that seems to have occurred is that amounts were wrongly included as income in previous years. See also Country Magazine Pty. Ltd. v. Federal Commissioner of Taxation[cdxlix]²⁹.

Latham C.J in adverting to the difference between a loss and an outgoing, said: “... a loss as distinguished from an outgoing simply and merely reduces income—or capital as the case may be.” Amalgamated Zinc (De Bavay’s) Ltd. v. Federal Commissioner of Taxation[cdl]³⁰. As the sums claimed were never part of the assessable income of the company, the subsequent acceptance of this fact could not be said to operate as a reduction in what was in fact the assessable income of the plaintiff, and in our opinion the total amount of these sums in the years ending 30th June, 1962, to 30th June, 1968, cannot be described as a loss under s. 68 (1).

It was not argued, nor in our opinion could it be argued, that the subsequent failure by the Commonwealth to pay the sum claimed under cl. 14 could constitute an outgoing incurred for the purpose of s. 68 (1).

Even if the total amount of these sums was properly to be regarded as a “loss” for the purpose of s. 68 (1), that section would apply only if (a) it had been incurred in gaining or producing the assessable income or (b) it had been necessarily incurred in carrying on a business for the purpose of gaining or producing that income. It seems that “assessable income” may here refer to assessable income generally and is not limited to the assessable income of the year in which the loss or outgoing is being claimed as a deduction (Federal Commissioner of Taxation v. Snowden & Willson Pty. Ltd.[cdli]³¹; John Fairfax & Sons Pty. Ltd. v. Federal Commissioner of Taxation[cdlii]³²).

Clearly, the first limb of s. 68 (1) could not apply. As to the second limb, whilst, if the amount written off is to be regarded as a “loss”, it could be said that it had been incurred in carrying on a business for the purpose of gaining or producing assessable income, the question is whether it could be said that it had been “necessarily incurred”. In Ronpibon Tin N.L. v. Federal Commissioner of Taxation[cdliii]³³ this phrase was said to mean “clearly appropriate or adapted for” the carrying on of a business to produce assessable income. In Federal Commissioner of Taxation v. Snowden & Willson Pty. Ltd.[cdliv]³⁴, Fullagar J said that the phrase extended to business expenditure arising out of exigencies created by unusual or difficult circumstances. It is difficult to fit this type of “loss” (if such it be) into this context and so bring it within the second limb of s. 68 (1) so we would consider that in any event that section would not apply.

For these reasons the appeal in relation to the assessment for the year ending 30th June, 1969 fails, and the appeal in relation to the assessment for the year ending 30th June, 1970 also fails.

Finally we deal with the demurrer proceedings which relate to the years ended 30th June, 1962 to 1968 inclusive. With respect to each of these years the plaintiff by letter dated 5th June, 1970 requested the defendant to amend the relevant assessment by excluding the amounts which the plaintiff had claimed as being receivable by the plaintiff as subsidy and which had been included in the assessable income. The relevant provisions called in aid by the plaintiff as authorizing the amendments were s. 232 (4) which refers to a mistake of fact and s. 232 (9) which refers to operations which extend over more than one year.

By letter dated 19th March, 1971 the defendant refused the requested amendments on the grounds that they were not authorized by law. This contention calls for an examination of s. 232 of the Ordinance and in particular the two subsections mentioned. Subsections (2) and (3) which deal with amendments where there is an avoidance of tax and amendments increasing the taxpayer’s liability are not applicable here. In the circumstances stated sub-s. (4) provides in effect that an amendment reducing the taxpayer’s liability may be made only within three years from the due date for payment of the tax and only for the purpose of correcting an error in calculation or a mistake of fact. Subsection (6) however provides for some extension where an application for amendment is made by the taxpayer within three years of the due date, in which case if all information needed to decide the application has been given within that period the Chief Collector may amend the assessment when he decides the application notwithstanding that that period has elapsed.

According to the amended statement of claim the due date for each of the years ended 30th June, 1967, and 1968, was 26th August, 1968, and an amendment under sub-s. (4) alone could therefore be made only up to 26th August, 1971; no such amendment was made during that period or, indeed, at all. The due date for each of the earlier years was earlier than August, 1968. The Chief Collector clearly made his decision on the applications—or, to adopt the words of sub-s. (6), decided the application—of 5th June, 1970 with his letter of 19th March, 1971. Whether the taxpayer could have kept the matter alive by making, within the three years’ period, another application for amendment is academic because no further application was made and the decision on the application having been made on 19th March, 1971. sub-s. (6) no longer has any operation in the present case.

The due dates for the years ended 30th June, 1962 to 1966 are not shown but it was not contended that for these years the application to amend made on 5th June, 1970, was within the time limit specified.

Subsection (5) is of no assistance to the taxpayer who has not shown for any of the relevant years an assessment amended within the last three years in respect of the relevant particulars. Similarly sub-s. (7) gives no assistance because in respect to the years now being considered there is no pending appeal review or objection and sub-ss. (8) and (10) are also irrelevant in the present circumstances.

The declaration which is sought and which is the subject of the demurrer relates of course to existing rights, duties and powers and for the reasons stated none of the subsections so far considered can now assist the taxpayer. We should add however, since the matter was canvassed in argument, that in our view the decision of the Chief Collector given on 19th March, 1971, in which was implicit the view that the mistake to be corrected by the proposed amendment was not a mistake of fact was correct. What the judgment of the High Court in 1969 revealed as we have already pointed out was not some change in the legal relationship between the Timber Company, as it is called, and the Commonwealth, but that the plaintiff in the High Court proceedings and the plaintiff here had wrongly construed the agreement with the Commonwealth as giving to the Timber Company a right to a subsidy when on the proper construction of the agreement it had conferred no such right. If there were a mistake it was a mistake of law and not of fact.

This leads to the submissions made regarding s. 232 (9) of the Ordinance which reads:

N2>“(9) Notwithstanding anything contained in this section, when the assessment of the taxable income or the chargeable income of a year includes an estimated amount of income derived by the taxpayer in that year from an operation or series of operations the profit or loss on which was not ascertainable at the end of that year owing to the fact that the operation or series of operations extended over more than one or parts of more than one year, the Chief Collector may, at any time within three years after ascertaining the total profit or loss actually derived or arising from the operation or series of operations, amend the assessment so as to ensure its completeness and accuracy on the basis of the profit or loss so ascertained.”

This provision is not easy to construe and there does not appear to be any reported decisions on it here or in Australia.

The plaintiff claims that by virtue of this provision the Chief Collector is empowered to re-open the assessments for the years ended 30th June, 1962 to 1968 inclusive. This claim is supported by saying that the profit for each of those years was not ascertainable until the decision of the High Court in June, 1969. For reasons already discussed we do not consider that the decision of the High Court made ascertainable anything which previously had not been ascertainable. We deal now with the contention that the profit or loss on any operation was not ascertainable at the end of any particular year.

It will be seen that the subsection commences by posing a situation where there is an assessment of taxable income which includes an estimated amount of income derived in a particular year from an operation the profit or loss on which is not ascertainable at the end of that year and where also that profit or loss is not so ascertainable owing to the fact that the operation extended over more than one year. We think that even on the basis of the plaintiff’s contention that the amount of alleged subsidy included in the return for any year was income derived during that year it is sufficient to dispose of the plaintiff’s argument to say that it is not shown on the facts before us that the profit or loss on any relevant operation was not ascertainable at the end of the relevant year.

The only suggestion of a carry-over from one tax year to another is in par. 8 of the statement of claim where the difference between the amount of the alleged subsidy included in returns and the amount actually claimed against the Commonwealth for the same year is said to be due to the fact “that at each 30th day of June ... certain goods had been shipped but were still on the water and payment of customs duty in respect of those goods had not been made.” But this explanation is offered to account for the difference referred to. It does not follow that the customs duty on any particular shipment was not ascertainable. On the contrary the amount of such duty could presumably have been calculated and in any event the onus is on the plaintiff to show the contrary.

If then at the end of the year the only item remaining to be calculated in order to ascertain the profit or loss on an operation or series of operations was the Australian customs duty, it has not been shown in relation to any such operation or series of operations that the profit or loss was not ascertainable at the end of the year.

The Chief Collector argued, firstly, that since any amount of subsidy was income derived only in the year in which it was received—a proposition we have already accepted—no problem arose in ascertaining at the end of any year the profit or loss on any operation or series of operations which might have attracted a subsidy and, secondly, that if the profit or loss was not ascertainable at the end of any year this was not because any of the taxpayer’s operations extended over more than one year but because the taxpayer did not know what sum, if any, the Commonwealth would see fit to pay by way of refund of customs duty.

Whether it follows from an acceptance of the first submission that sub-s. (9) has no operation raises, in our opinion, difficult questions of construction which need not be answered in these proceedings and which we therefore leave open.

As to the second submission, we have already said that it has not been shown that the profit or loss in relation to any operation was not ascertainable at the end of a year. To this we now add that it has not been shown that the extension of any operation beyond the end of a year has resulted in the profit or loss on any operation being not ascertainable at the end of that year. In these circumstances sub-s. (9) cannot assist the plaintiff.

The result in relation to each of the years ending 30th June, 1962, to 1968, might be thought to be a harsh one for the taxpayer, especially as the Chief Collector concedes that the taxpayer has in the event paid more tax than it need have paid. However, our decision can only be based upon the present provisions of the Ordinance.

In our judgment accordingly the demurrer should be allowed and judgment given for the defendant in the action. Each of the appeals should be dismissed and the respective assessments confirmed.

In the action, demurrer allowed; judgment for the defendant with costs including reserved costs to be taxed. In each appeal, appeal dismissed, assessment confirmed. Appellant to pay respondent’s taxed costs.

[cdxxi]Infra p. 403.

[cdxxii]Infra p. 404.

[cdxxiii]The relevant provisions of s. 232 of the Income Tax Ordinance 1959-1969 are as follows:—

N2>(1) The Chief Collector may, subject to this section, at any time amend an assessment by making such alterations in, or additions to, the assessment as he thinks necessary, notwithstanding that tax may have been paid in respect of the assessment.

N2>(2) Where a taxpayer has not made to the Chief Collector a full and true disclosure of all the material facts necessary for his assessment, and there has been an avoidance of tax, the Chief Collector may—

(a) where he is of opinion that the avoidance of tax is due to fraud or evasion—at any time; and

(b) in any other case—within six years from the date upon which the tax became due and payable under the assessment, amend the assessment by making such alterations in, or additions to, the assessment as he thinks necessary to correct an error in calculation or a mistake of fact, or to prevent avoidance of tax, as the case may be.

N2>(3) Where a taxpayer has made to the Chief Collector a full and true disclosure of all the material facts necessary for his assessment, and an assessment is made after that disclosure, an amendment of the assessment increasing the liability of the taxpayer in any particular shall not be made after the expiration of three years from the date upon which the tax became due and payable under that assessment and shall not be made before the expiration of that period except to correct an error in calculation or a mistake of fact.

N2>(4) An amendment effecting a reduction in the liability of a taxpayer under an assessment shall not be made after the expiration of three years from the date upon which the tax became due and payable under that assessment and shall not be made before the expiration of that period except to correct an error in calculation or a mistake of fact.

N2>(5) Where an assessment has, under this section, been amended in any particular, the Chief Collector may, within three years from the date upon which the tax became due under the amended assessment, make, in or in respect of that particular, such further amendment in the assessment as, in his opinion, is necessary to effect such reduction in the liability of the taxpayer under the assessment as is just.

N2>(6) Where an application for an amendment in his assessment is made by a taxpayer within three years from the date upon which the tax became due and payable under that assessment, and the taxpayer has supplied to the Chief Collector within that period all information needed by the Chief Collector for the purpose of deciding the application, the Chief Collector may amend the assessment when he decides that application notwithstanding that that period has elapsed.

N2>(7) This section does not prevent the amendment of an assessment in order to give effect to the decision upon an appeal or review, or its amendment by way of reduction in any particular in pursuance of an objection made by the taxpayer or pending an appeal or review.

N2>(8) Where—

[(a) a provision of this Ordinance is expressly made to depend in any particular upon a determination, opinion or judgment of the Chief Collector; and

(b) an assessment is affected in any particular by that determination, opinion or judgment,

N2>then if, after the making of the assessment it appears to the Chief Collector that the determination, opinion or judgment was erroneous, he may correct it and amend the assessment accordingly in the same circumstances as he could under this section amend an assessment by reason of a mistake of fact.

N2>(9) Notwithstanding anything contained in this section, when the assessment of the taxable income or the chargeable income of a year includes an estimated amount of income derived by the taxpayer in that year from an operation or series of operations the profit or loss on which was not ascertainable at the end of that year owing to the fact that the operation or series of operations extended over more than one or parts of more than one year, the Chief Collector may, at any time within three years after ascertaining the total profit or loss actually derived or arising from the operation or series of operations, amend the assessment so as to ensure its completeness and accuracy on the basis of the profit or loss so ascertained.

N2>(10) This section does not prevent the amendment, at any time, of an assessment for the purpose of giving effect to the provisions of s. 57a, of sub-s. (6) of s. 78, s. 99 or paragraph (b) of sub-s. (2), or sub-s. (3) of s. 140, of this Ordinance.

[cdxxiv](1969) 121 C.L.R. 353.

[cdxxv](1970) 45 A.L.J.R. 428.

[cdxxvi][1938] HCA 69; (1938) 63 C.L.R. 108, at pp. 155-159.

[cdxxvii][1965] HCA 58; (1965) 114 C.L.R. 314, per Barwick C.J., at p. 320.

[cdxxviii](1969) 121 C.L.R. 353.

[cdxxix][1938] HCA 69; (1938) 63 C.L.R. 108, at p. 155.

[cdxxx](1970) 45 A.L.J.R. 428, at p. 430.

[cdxxxi](1968-70) 119 C.L.R. 612.

[cdxxxii](1952-53) 86 C.L.R. 570.

[cdxxxiii][1954] A.C. 182.

[cdxxxiv](1965) 114 C.L.R. 314.

[cdxxxv][1965] HCA 58; (1965) 114 C.L.R. 314, at pp. 317-8.