Australian Machinery and Investment Co Ltd v Commissioner of Taxation

180 CLR 9

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(Decision by: DIXON J)

Australian Machinery and Investment Co Ltd
v Deputy Commissioner of Taxation

Court:

Judges: Latham CJ
Starke J

Dixon JMcTiernan J
Williams J

Subject References:
Taxation and revenue
Exempt Income
Income sourced outside Australia
Appeal against assessment
Sale of shares in England
Appeal against assessment
Power to set aside

Legislative References:
Income Tax Assessment Act 1936 (Cth) - s 23(q); s 99

Hearing date: Sydney, 8 April 1946, 9 April 1946, 10 April 1946
Judgment date: 7 June 1946

Melbourne

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Decision by:
DIXON J

This matter comes before us by way of appeal and cross-appeal from an order made by Rich J under s 199 of the Income Tax Assessment Act 1936 (Cth). The order contains six declarations concerning the manner in which the taxpayer company's income should be assessed, having regard particularly to s 23(q) of the Act. It proceeds to set aside the assessment of the Commissioner and it remits the matter to him to be dealt with under the Act and for the re-assessment of the company's taxable income consistently with the order.

The Commissioner, under his cross-appeal, objects to the course adopted in the order upon the grounds, first, that s 199 gives the Court no jurisdiction to set an assessment aside, and, secondly, that, if the Court does possess such a jurisdiction, it ought not to have been exercised in the present case, because of the consequences produced by vacating the assessment.

The first ground of the objection attempts to place a restriction upon the power of the Court in dealing with taxation appeals which, I should think, would prove awkward both from the point of view of the Court and of the Commissioner.

When it is decided that the principle upon which an assessment of taxable income has been based is erroneous, it becomes necessary to reassess the income in detail and that is a thing which the Court cannot well do and which ought not to be taken out of the Commissioner's hands. It sometimes happens that a decision on appeal from the Commissioner or the Board of Review does go to the basis of an assessment. In such a case a re-assessment ab initio will be found desirable, if not necessary. When that has happened or when, for other reasons, it has been considered desirable that the Commissioner should make a new assessment in the light of the Court's decision, orders have repeatedly been made for the remission of the assessment to the Commissioner for re-assessment. There have also been cases where it has been thought necessary simply to quash the assessment outright. Thus many orders setting aside assessments have been made. Some orders have expressly set aside the earlier assessment as a preliminary to ordering a remission. Others, without expressly setting aside the assessment, have remitted it for re-assessment. But the remission of a proceeding for re-consideration, re-determination, re-hearing or the re-doing of any other act in the law in relation thereto necessarily involves the setting aside or avoidance of what was first done in the proceeding. Because so many tax questions are decided upon cases stated, the final order disposing of taxation appeals does not appear in the reports but examples of orders in one form or another setting aside assessments will be found in a number of report cases (Associated Newspapers Ltd v Federal Commissioner of Taxation (1944), 69 CLR 257 , at p 269; Federal Commissioner of Taxation v Henderson (1943), 68 CLR 29 , at pp 39, 50; Federal Commissioner of Taxation v United Aircraft Corporation (1943), 68 CLR 525 , at pp 529, 552; Robert Coldstream Partners v Federal Commissioner of Taxation (1943), 68 CLR 391 , at p 400; Federal Commissioner of Taxation v Whiting (1942), 68 CLR 199 , at p 209; New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938), 61 CLR 179 , at p 208; Gregory v Deputy Federal Commissioner of Taxation (WA) (1937), 57 CLR 774 , at pp 778-779; Evans v Deputy Federal Commissioner of Taxation (SA) (1936), 55 CLR 80 , at pp 103, 109; Jolly v Federal Commissioner of Taxation (1934), 50 CLR 131 , at pp 151, 153; Federal Commissioner of Taxation v Standard Trust Ltd (1933), 49 CLR 609 , at pp 622, 642; Stewart Dawson & Co (Vict) Pty Ltd v Federal Commissioner of Taxation (1933), 48 CLR 683 , at p 692 (a land tax assessment); Smith v Federal Commissioner of Taxation (1932), 48 CLR 178 , at p 191; Ruhamah Property Co Ltd v Federal Commissioner of Taxation (1932), 48 CLR 48 , at p 56; Countess of Bective v Federal Commissioner of Taxation (1932), 47 CLR 417 , at p 426; Kellow-Falkiner Pty Ltd v Federal Commissioner of Taxation (1928), 34 ALR 276 , at p 281.) Sometimes the Commissioner's decision upon the objections, not his assessment, has been set aside and the remission of the matter to him has been for the purpose of re-considering the objections (See, eg, the order of Rich J in Australian Mercantile Land & Finance Co Ltd v Federal Commissioner of Taxation (1929), 42 CLR 145 , at p 154.) The language of s 199(1) appears to me quite general enough to empower the Court to make orders setting aside assessments whether for the purpose of directing re-assessment or in order to give effect to a determination that there is no liability to assessment. I see no reason for restricting the words "such order as it thinks fit" to the kinds of order specifically referred to in the sub-section, viz orders confirming reducing increasing or varying assessments. It would be a misfortune if such a restriction were placed on the provision. For justice could not be done in some cases unless the Court could quash an assessment, and, in others, unless it could vacate an assessment and remit the question of the amount of the taxable income to the Commissioner for complete re-assessment. The second ground for the objection goes, not to the existence of the power, but to its exercise in the circumstances of the present case. It was said that, because the original assessment had been made as long ago as 20 April 1938, there was a danger of the taxpayer's contending, under s 170, that the re-assessment was bad because out of time. That on the part of the taxpayer company some such contention was in contemplation appeared to be true enough, but, ultimately, counsel for the company said that an objection on that ground would not be made to the re-assessment, if and when made pursuant to the order of Rich J. I do not think that the company suffered by this concession; for I can see nothing whatever in s 170 to support the point abandoned. But, under the second ground of objection, more solid reasons were advanced by counsel for the Commissioner against setting aside the assessment. Reference was made to other proceedings before us from which it had appeared that for a very long time the taxpayer company had contrived to delay making any substantial payment on account of tax, and it was pointed out that, on any view of the merits, the liability of the company would amount to a considerable sum. If the assessment were altogether set aside, the additional tax of ten per cent per annum prima facie payable under s 207 on unpaid tax would clearly not be recoverable in respect of the amount finally ascertained to be the tax for which the company is liable. That is to say the ten per cent per annum would not run from the date fixed by the original assessment for payment but only from the date of payment prospectively fixed by the new assessment. Then the fresh assessment would be open to any objection whatever and the company would not be limited to the grounds they had thought fit to take by way of objection to the present assessment. That, of course, might afford a new means of delaying the settling of the amount of the company's liability. I do not think that the attention of Rich J was drawn to these consequences of setting aside the assessment. Otherwise, he probably would have moulded the order so as to avoid them. To do so it is only necessary to bring the operation of the order forward, so to speak, from the procedure of assessment to the procedure on objection, and, instead of directing a re-performance of the duty of assessment, to call upon the Commissioner to give effect to the declarations contained in the order in the course of again dealing with the taxpayer's objections. If, instead of setting aside the assessment, the order were to set aside his decision on the objections and remit the objections to him for re-consideration and for re-determination in conformity with the declaration contained in the order, then the ground of the Commissioner's fears or complaints would disappear. If, in other respects, it is our opinion that the order should be supported, then I think that we should re-mould it so as to adopt this course. The chief issue before Rich J arose under s 23(q) of the Income Tax Assessment Act 1936. The material part of that provision places in the list of income exempt from income tax income derived by a resident from sources out of Australia where that income is not exempt from income tax in the country where it is derived. The taxpayer company is incorporated in Victoria and, therefore falls within par (b) of the definition of "resident" in s 6. Under s 25(1)(a) its assessable income includes the gross income derived directly from all sources, whether in or out of Australia, which is not exempt income. Apart from the operation of s 23(q) there is no question before us of the liability of the taxpayer company in respect of the whole of its income from all sources, nor of the basis upon which the income is computed or assessed. So far as we are concerned the matter turns altogether upon the proper application of s 23(q). That provision is shortly expressed, but its brevity conceals some difficulties. It will be seen that it lays down two conditions; first, that the income shall be derived from sources out of Australia, and, second, that the income shall not be exempt from taxation in the country where it is derived. The first condition can be of little practical importance, because, in satisfying the second condition, it must always be shown that the first is fulfilled. On the other hand, to show that the income if derived from sources out of Australia does not necessarily show where it is derived. For there may be several countries in question. Accordingly, s 42 can have no application. For it provides only for cases where the question is whether the whole or any part (and if a part what part) of any profit is derived by a person from sources in Australia. It is the converse inquiry, viz what income arises out of Australia in some other and what country.

The cardinal question in the present case is how much of the taxpayer company's income for the relevant accounting period is derived from England and is not exempt from income tax in that country "Exempt" does not, I think, mean that the income must be the subject of a specific exemption or exception under the law of the country where it is derived. The word is used, I think, inartificially to mean "not subject to tax". But it is obvious that there may be a difficulty in identifying the income which is subject to tax and isolating it in the Australian assessment. For the latter assessment will be compiled without regard to territorial limitations and without dividing up a total business or connected series of operations into separate components or steps according to political boundaries. Yet the tax abroad may be levied only on what is attributable to that severable part of the total operations which takes place in the other taxing country.

Section 23(q) appears to require for its application the fulfilment of some not very easy conditions. For it contemplates specific income not exempt from tax in the country where it is derived. It applies where income from all sources is brought into tax under Australian law on the ground of residence. It supposes that it will be possible out of the total income of the taxpayer to segregate specific income of which it may be predicated that it is not so exempt. But it is evident that, where business operations or transactions spread from Australia to a country or countries overseas, the course of accounting by which the income resulting from the entire operations or transactions is ascertained may, and indeed almost certainly must, depart widely from that employed in the other country for the purpose of finding what income was derived there by a taxpayer who, except in cases of dual residence, will ex hypothesi be a non-resident. Take, for instance, the case of a resident of Australia producing merchandise here and selling it in the United Kingdom. In the Australian assessment his assessable income will be the gross proceeds arising in the United Kingdom, and his taxable income will be obtained by deducting expenditure the greater part of which is incurred in this country as costs of production. Yet, if r 12 of the All Schedule Rules of the Income Tax Act 1918 (UK) is invoked, the income derived in the United Kingdom would be assessed on the basis of the profits that a merchant might have earned if he had bought the merchandise direct from a manufacturer or producer.

The reasoning which this Court applied in Texas Co (Australasia) Ltd v Federal Commissioner of Taxation ((1940) 63 CLR 382 , at pp 431-432, 452, 470-472) to the analogous but somewhat different provision made by s 14(1)(q) of the Income Tax Assessment Act 1922 is, perhaps, relevant to s 23(q). That reasoning may result in the exemption given by s 23(q) being construed as applicable to assessable, as distinguished from taxable, income: a construction supported by par (b) of the proviso introduced by the Income Tax Assessment Act 1941 (Cth) (Act No 58 of 1941). The consequence would be that, in ascertaining whether the income is "not exempt" in the country where it is derived, the fact that owing to losses and outgoings in that country it is wiped out and so not actually taxed may be disregarded as immaterial. But it would be a mistake to suppose that everything on the debit side of a trading or profit and loss account represents such an actual loss or outgoing. In the example given, the value placed upon trading stock in England may mean no actual expenditure at all. It may mean that, under the application given to the tax laws of the United Kingdom, trading stock produced in Australia is valued on the basis of an increase in value over the costs of production in Australia and of transportation. That would only be another way of saying that, of the full profit realized by the sales in Great Britain from the whole of the operations of the business or from the entire transaction, the amount represented by the increased value so placed on the trading stock is to be attributed, not to a source in the United Kingdom, but to an Australian source. So much of the profit would, therefore, be excluded from the ambit of the United Kingdom tax and it would be untrue to say that it was "not exempt from income tax in the country" (viz the United Kingdom) "where it was derived" (scil as the gross proceeds of sale).

In the case under our consideration, the taxpayer company did not market in the United Kingdom goods produced in Australia. It carried on what doubtless was an interconnected series of operations beginning with the acquisition of mining rights and the like in Western Australia and ending in the conversion into money in England of shares of which it became possessed by successive promotions of companies.

The appeal concerns the assessment of the taxpayer company for the financial year 1936-1937 based upon income derived from all sources during an accounting period of twelve months ended 31 October 1936. The facts brought before the Court do not include a great deal of information about the transactions outside this period, though probably it is a case which would become clearer if the matter were examined as what Lord Sumner described as "one continuous story" so as to "show method and system and so remove" doubt which might be entertained if the years were examined "in isolation from one another" 16 Levene v Inland Revenue Commissioners, [1928] AC 217 , at p 227.. But, however that may be, it is certainly a case which should be considered in reference to its concrete facts. In the end, I think that our decision is confined to very narrow ground, because of the course adopted by the parties both before Rich J and on appeal. But, even so, I do not think we should deal with it in any abstract way. The application of s 23(q) must be controlled by the precise facts of any given case in which it is invoked. I shall, therefore, proceed to set out what I conceive to be the state of facts relevant to the application of the provision, as I collect them from the materials before us.

As to the general plan of the company's operations, it is enough to say that, beginning about 1929, it acquired mining reservations or "leases" in Western Australia, maintained and developed them and then proceeded to incorporate a great many companies in Western Australia, twenty-seven in number to be precise, to take them over in consideration of shares. Up to 31 October 1932 (the end of the taxpayer company's accounting period of that year), the expenditure it had incurred in acquiring the mining interests, maintaining and developing them and in promoting the twenty-seven companies in Western Australia was PD52,836.5.8. The property and interests upon which this sum, up to that date, had been spent were transferred to the twenty-seven companies for a consideration in shares, presumably fully paid up, amounting in nominal value to PD3,153,240. Subsequently further sums of money were expended by the taxpayer company in maintaining and developing the mining reservations and the promotion of companies and so on with the result that, by 31 October 1935 as I gather, the expenditure stood at PD119,251.1.10. But, by that date, seven companies had been formed in England, each of which had taken over or agreed to take over the shares held by the taxpayer company in a group of the Western Australian companies. The total shareholding of the taxpayer company in the twenty-seven Australian companies, which in the meantime had somewhat increased, was divided into seven groups and all of it was thus made over to the seven English companies.

The consideration consisted of shares, presumably paid up, in these companies amounting in nominal value to PD1,075,000, of options to take up further shares, and of cash amounting to PD481,945.

These transactions all took place in England. The names of the seven English companies were - Anglo Australian Gold Development Ltd, Gold Fields Australia Ltd, North Kalgurli Gold Development Ltd, Murchison Gold Development Ltd, Great Boulder Mining & Finance Ltd, Southern Cross Gold Development Ltd and Commonwealth Mining & Finance Ltd

The taxpayer company also formed in England other companies and two of them play a part in the material transactions of the accounting period under consideration. They were Kookaburra Investments Ltd and Meekatharra Gold Mines Ltd The first of these was one of two companies promoted for the further exchange of shares. The second appears to have been formed to take over the shares of fresh Western Australian companies.

The items which for the relevant financial year, viz. 1936-1937, raise the question how and to what extent s 23(q) applies may best be explained by some analysis of the assessment. Fortunately the analysis need only be partial.

The amount of taxable income upon which the company was finally assessed (by notice of amended assessment dated 19 March 1942) was PD191,700. This total was made up of three heads of income, or alleged income. They are - (1) An amount of PD150,168.18.4d being the net balance of certain gains, real or supposed, in connection with shares in three of the English companies, viz. Commonwealth Mining & Finance Ltd; Great Boulder Mining & Finance Ltd; and Anglo Australian Gold Development, the net balance remaining after debiting against them certain expenses and deficiencies; (2) an amount of PD22,213.10.8d being the net balance of certain gains (actual or hypothetical) in connection with shares in three Western Australian companies, viz. King of Creation Gold Mines Ltd; Lalla Rookh Gold Mines Ltd and Comet Gold Mines Ltd; it is the balance remaining after throwing against these gains certain debits the nature of which is not material; (3) an amount of PD19,317.11s.0d based upon a so-called profit and loss account containing receipts and disbursements on account of revenue and carrying on its credit side items of income from Western Australia, comprising rents, dividends, interest, certain share dealings, receipts from treatment of tailings and profit on the sale of carbons and diamonds and two items ascribed to London, namely share dealings, PD6,285.2s.11d, and profit on the sale of options over shares in a Victorian company, named Mephan Ferguson Pty Ltd, PD2,500.

I shall deal with these three headings in order.

(1) The chief source of the balance of PD150,168.18s.4d is a credit item of PD196,875,0.0. It consists of the value placed upon 350,000 paid up shares of 5s in Commonwealth Mining & Finance Ltd, a company registered in England. The value assigned to the shares was 9sE converted into Australian monetary expression. By contracts, dated 17 May 1934, this company agreed to purchase shares held by the taxpayer company in five of the Western Australian companies to the number of 677,500. In effect, the consideration was the allotment of share in the purchasing company. It allotted 350,000 shares to the taxpayer company in settlement of the latter's rights under these contracts.

The taxpayer company took the shares into its accounts for the accounting period under consideration at the value of 9sE a share. Converted to pounds Australian this amounts to PD196,875. Before the end of the period the taxpayer company sold 200,000 of the 350,000 shares in Commonwealth Mining & Finance Ltd to the subsidiary company it formed in the United Kingdom named Kookaburra Investments Ltd, for 90,000 paid up shares of PD1.0.0, that is the nominal equivalent of 9sE. This transaction, however, is not treated as contributing to the supposed gain. Indeed shortly afterwards, but in the next accounting period, a general devaluation took place both by Kookaburra Investments Ltd and by the taxpayer company. It will be noticed that the source of what is treated as an item of gain, viz the value assigned to the shares issued to the taxpayer company by Commonwealth Mining & Finance Ltd, is the disposal of shares in Australian companies to an English company.

The second of the three items under this heading goes to the next step in the taxpayer company's dealings. It arises from the exchange of shares in one of the companies formed in England, called Great Boulder Mining & Finance Ltd, for shares in Commonwealth Mining & Finance Ltd, which, as already stated is another such company.

The shares in Great Boulder Mining & Finance Ltd, 124,498 in number, were apparently valued in the taxpayer company's books at 4s.4 1/2d each and were exchanged for an equal number of shares in Commonwealth Mining & Finance Ltd which were valued at 6s.3d each. The surplus, real or fictitious, shown as produced by this transaction, viz PD11,671,13s.9d was diminished by debits consisting in a small loss on the sale of some unnamed options and the reduction in value of some other shares, also unnamed. The residue, PD9,516.1.8, constitutes the second of the three items under the first heading.

The third item is a small sum of PD62.10s.0d said to have been gained, probably in shares, upon a sale of Australian shares to another of the companies formed in England, called Anglo Australian Gold Development Ltd, presumably for shares.

(2) Under the second heading the so called profit and loss arises from the formation during the accounting period by the taxpayer company of three companies in Western Australia for the acquisition from it of gold mining rights. In each of the three cases the gold mining rights "leases" etc, were transferred to the company so formed and, whether the consideration was expressed in shares or not, it was satisfied in shares, or, at all events, shares were taken up of equal or greater amount.

The order of Rich J declares that up to this point no profit was made and from these declarations there is no appeal. But the taxpayer company took a further step. It disposed of the shares in the Western Australian companies to other companies, in one case apparently for money, and in the other two in exchange for their shares. In one of the two latter cases the second company was incorporated in Western Australia and no question under s 23(q) arises from that transaction. But in the other two cases the shares were transferred to English companies. In the case of the exchange of shares the nominal amount of the shares in the English company which presumably were fully paid up would suffice to disclose an apparent profit if compared with the expenditure incurred in connection with the acquisition and development of the leases and the carrying out of the transaction by the taxpayer company. Further, though the nominal amount of the shares in the Western Australian company and in the English company were the same, there was a difference in the currency and that meant an increase in relative value by 25 per cent. In this transaction Lalla Rookh Gold Mines Ltd was the Western Australian company whose shares were transferred to an English company and Meekatharra Gold Mines Ltd was the English company.

In the third case, that of shares in Comet Gold Mines Ltd, the facts admitted show that the sale to the English company or companies was completed by the payment after the close of the accounting period of a cash consideration. In the meantime at the close of the period the taxpayer company took into its accounts as a profit the difference between the amount expended in connection with the leases etc and the amount of the nominal value of the shares in the Western Australian company. This sum, however, according to the unappealed declaration already mentioned contained in the order, is not a profit. Upon this state of facts I do not think that we are concerned with the transaction.

The result is that under the second heading (that relating to the sum of PD22,213.10s.8d) all that concerns s 23(q) is the transaction by which shares in the Western Australian company, Lalla Rookh Gold Mines Ltd, were sold for shares in the English company, Meekatharra Gold Mines Ltd The nominal value of the shares was PDE42,000, and, according to another part of the same declaration unappealed, there should be deducted from the proceeds of sale the sum of PD10,533 together with incidental expenses, that is the amount spent in the acquisition and development of the leases plant etc. It is not clear whether for the purpose the shares in Meekatharra Gold Mines Ltd are to be considered "proceeds of sale".

(3) Under the third heading two items only concern s 23(q). One item is a surplus produced during the accounting period by the purchase and sale by the taxpayer company of shares in English companies. The surplus amounted to PD15,200.5s.6d, but it is reduced by debits arising from other dealings which need not be considered, to PD6,285.2s.11d. The credit items in the statement of transactions giving rise to this surplus consist in the proceeds of the sale of shares in Commonwealth Mining & Finance Ltd and Great Boulder Mining & Finance Ltd It would appear that these transactions have no territorial connection with Australia except that the two companies held shares in the Western Australian Mining companies.

The other item is a sum of PD2,500 representing the difference between the sum paid by the taxpayer company for an option acquired by an agreement made in England over shares in a Victorian company called Mephan Ferguson Pty Ltd and the sum for which the option was resold in England to Pipe Options Ltd, a subsidiary company formed by the taxpayer in England. So far as this represented a profit at all, probably it should be considered to have arisen in England. Except that the shares over which the option was granted were in a Victorian company, there is nothing to take the transaction territorially outside of England. But since the option expired and proved valueless and since Pipe Options was a subsidiary company, obviously there are grounds for doubting whether the supposed profit was not illusory.

From the foregoing it will be seen that, stated summarily, there are six items of "gain", real or supposed, in respect of which s 23(q) is invoked, gain not in the sense of realized profit, but of growth of or increase in a credit or credits.

They are:

(1)

The value, namely 9sE a share placed upon the 350,000 shares acquired in the English company, Commonwealth Mining & Finance Ltd, in consideration of shares in Western Australian companies.

(2)

The difference between 6s.3d a share (the valuation) on 124,498 shares in the English Commonwealth Mining & Finance Ltd acquired in exchange for a like number of shares in the English Great Boulder Mining & Finance Ltd and 4s.4 1/2d a share, the value placed upon the latter.

(3)

The gain of PD62.10.0 on the acquisition of shares in the English Anglo-Australia Gold Development Ltd in consideration of Australian shares.

(4)

The gain arising upon the transfer of shares in the Western Australian Lalla Rookh Gold Mines Ltd in consideration of shares in the English Meekatharra Gold Mines Ltd consisting substantially of the difference between the amount expended in respect of the original "leases", promotion etc and the nominal value of the shares acquired and converted for expression into Australian money, the transaction the subject of the fourth declaration, unappealed.

(5)

The surplus upon the purchase and sale of shares in English companies (shown as a net item of PD6,285.2.11d).

(6)

The gain (PD2,500) on the acquisition and disposal in England of an option over shares in a Victorian company.

All these dealings took place in England and it may be assumed that they took place in the course of a trade exercised within the United Kingdom, the profits whereof would be chargeable under Sch. D of the Income Tax Act 1918 (UK). On this footing it was not denied on the part of the Commissioner that, in so far as the gains thereof comprised in the assessment were not ascribable to the Australian character of the shares or assets transferred, the income was not only derived from a source out of Australia but was not exempt from income tax in Great Britain where it was derived, so that to part of it at least s 23(q) had an application. The curious thing, however, is that, on appeal from the English assessments to tax, the General Commissioners decided that no tax was payable in the United Kingdom in respect of any relevant period. All we know of their reasons is expressed in the following passage from the mutual admissions of fact:

"The Commissioners held that the profits assessable were the profits received from the sale of the shares in the Western Australian companies to the seven English companies and that in calculating such profits the par value of the Western Australian companies' shares must be deducted as the cost to the company of the purchase of such shares. It was agreed that consequent upon such finding the assessments fell to be discharged."

It seems evident that the General Commissioners took the view that for the purpose of the trade exercised in the United Kingdom the paid up shares in the Western Australian company must be treated for the purpose of the account as having been obtained by the company for a consideration equivalent to their nominal value. If it were otherwise, the requirements of the company law would not have been satisfied and the shares would not, upon a liquidation, stand as fully paid up. In other words, they would seem to have applied to the ascertainment of the cost or value of the shares as they came into the "trade" within the United Kingdom, the doctrine of such company cases as In re Theatrical Trust Ltd (Chapman's Case) 17 [1895] 1 CH 771 , at pp 774-775., notwithstanding that it was a revenue matter. It is the view from which the decision mentioned by Williams J during the argument, Craddock v Zevo Finance Co Ltd 18 [1944] 1 All ER 566 ., starts. See further the reference to that case in the judgment of Williams J in Associated Newspapers Ltd v Federal Commissioner of Taxation 19 (1944) 69 CLR, at p 262.. That means that, for the purpose of the imposition of the income tax in the United Kingdom, the comparison was not between the actual losses and outgoings of the taxpayer company and its gains or receipts recovered in the United Kingdom, but between the value imputed as the result of a legal presumption to the shares or to the consideration paid for them. That value or consideration was the result of a transaction which, for the purpose of the Australian assessment of income from all sources, was only an intermediate step without any special accounting significance; but, in England, it fixed the value at which the shares came into the account for the purpose of the trade there exercised. The reason why it was agreed before the General Commissioners that this view meant that the English assessments fell to be discharged lies in the fact that the nominal value of the paid up shares in the Western

Australian companies was PD3,152,240 and nothing like that sum was recovered by the transactions in England. To my mind this is not a question of a loss or outgoing in the trade exercised in England wiping out assessable income there gained. It appears to me to amount to a decision that before the Western Australian shares considered as assets were disposed of in England, or taken into the "trade" there exercised, they stood at a value which contained whatever profit the entire transaction showed, so that the dealings in England were but a realization of part of the unrealized profit or increased value which had already accrued as a result of the operations out of the United Kingdom. If so, it is perhaps not so clear that the income with which we are concerned under the first, third, fourth and even the second of the foregoing items of gain is not exempt from income tax in the United Kingdom. On the other hand, it may not perhaps have much bearing on the fifth or the sixth. But it is unnecessary to pursue the difficult question of the identification of the income not exempt from tax in the country where derived, since the parties who, doubtless, have more information about the facts than the materials before us disclose, are at one in treating s 23(q) as applicable to so much of the assessable income as is ascribed to the operations of the taxpayer company in England as a source. What we are asked by the parties to decide is of a limited description. In the first place, we are, in effect, asked to decide a proposition expressed in the third ground of the taxpayer company's notice of appeal from the order of Rich J. That ground seeks to have added to the declarations made by Rich J a further declaration

"that the income derived by the appellant company in the tax year ended 31 October 1936 by trading in England in shares in English companies whether such shares were acquired in return for shares in the Australian companies or otherwise or in other property not situated in Australia was derived exclusively from a source in the United Kingdom and is not liable to income tax under the legislation of the Commonwealth if that income so derived is not exempt from income tax in England."

The application of this proposition to the precise items of gain I have enumerated was not brought out very clearly, or perhaps at all, during the argument. I should prefer to be in a position of deciding the ultimate question in respect of each item, namely whether it should, or should not, be excluded under s 23(q) in ascertaining the taxable income. But that we are not asked to do and it appears to be assumed on both sides that the materials which they placed before Rich J are inadequate for the purpose.

Further, the parties have agreed upon a form of declaration which they desire to have substituted for the first declaration made by Rich J. His Honour's declaration said -

"That the business and operations from which the Appellant derived its profit were carried out in part in Australia and in part in the United Kingdom, and that for the purposes of s 23(q) of the Income Tax Assessment Act 1936 the income of the Appellant is derived in part from sources out of Australia."

That seems to me to be correct, but not to carry the matter very far. However, for some reason I have not grasped, the taxpayer, the appellant, seems to have considered that the words "in part" did not provide for items of revenue like interest and dividends derived altogether from England, items excluded from the assessment as finally amended. We were told that the parties were agreed in the substitution of the following declaration -

"that the appellant company derived its profit from its business and operations partly from sources exclusively in Australia, partly from sources exclusively in the United Kingdom, and as to the remainder from a source partly in Australia and partly in the United Kingdom, and that for the purposes of s 23(q) of the Income Tax Assessment Act 1936 the profit of the company which was derived from sources out of Australia is exempt from tax in Australia if not exempt from tax in the United Kingdom."

I suppose that we ought to make this substitution by consent. It is in the light of the substituted declaration that we are asked to say that the income from trading in England in shares in English companies was exclusively derived from a source in the United Kingdom. But s 23(q) does not use the word "exclusively" and it uses the word "source" only in the opening clause, "income derived from sources out of Australia". I think that the parties are entitled to have it decided, assuming the materials are sufficient, whether given "income" is derived from sources out of Australia and that question I am prepared to consider and, if possible, decide in reference to each of the items of income I have enumerated. But it is a single though complex question whether "that income is not exempt from income tax in the country where it is derived", and I am not prepared to embark on the hazards which may attend declarations of right based on an attempt to split it up into supposed components some or one only of which are to be submitted for decision.

I regard it as clear that the second, fifth and sixth of the foregoing items are credits arising from sources out of Australia.

The fifth has no connection with Australia. The shares in the two English companies appear to have been purchased and resold in England without reference to any Australian ingredient except that the assets of each company comprised holdings in Australian companies.

In the sixth case there was a dealing in England with an option or options. The fact that the options were over shares in a Victorian company does not seem to me enough to bring the source of the credit into Australia.

The second item, the supposed enlargement of value by reason of the exchange of shares in one English company for those in another seems, prima facie, to be remote from a source in Australia and there are no facts to show otherwise.

The first of the above mentioned items depends on somewhat different considerations. The shares disposed of were in the capital of an Australian company. The credit in question is the gross value set upon the consideration obtained for them in England. The consideration arose in England from a transaction in England and if attention is confined only to the amount so obtained an Australian source is not readily discernible. But suppose an attempt is made to dissect the amount obtained in the hope of finding how much of it represents the value attached to the Australian shares out of England and how much to the "operation" of the company in England and the consequent creation of a market there for the shares. If such a dissection could be made, it might be said that only the second part was attributable to Great Britain. But to make such an attempt at dissection is really to construct an English trading account in respect of this block of shares and to deduct from the amount obtained the value of the shares as at the time they were appropriated to the English trade. To do so deserts the hypothesis of the parties that we are concerned only with assessable income, if adherence to that hypothesis really matters under s 23(q). But what may be more important, it is the first step in the process adopted by the General Commissioners in England. If the second step were taken of treating the Australian shares as having a par value, it would seem that this transaction would show no English profit, and then, I think, it might plausibly be urged that none of the profits were "not exempt from tax" in the United Kingdom. About these matters there is hardly enough information before us to enable us to deal with them, and, although prima facie the supposed enlargement of assets arose in England, I do not think that we are on safe enough ground to make a declaration binding the Commissioner to reassess upon the basis that none of the gain of the first item arose from sources in Australia.

These observations are applicable in substance to the fourth item and to the third, though the amount of the latter is so small that it might be neglected among such high figures involving so many difficulties.

There are some minor matters to be disposed of raised by the notices of appeal and cross-appeal.

(1)

The third declaration contained in the order states that the profits made from the realization of shares in English companies etc were derived partly from a source within and partly from a source outside Australia. It is contended that this declaration should be restricted to realizations in Australia of such shares and that it was so intended. One transaction by which English shares were realized in Australia was pointedly drawn to the attention of Rich J and the declaration may indeed have been directed to it, though it is true that the date given for it seems to show that it fell outside the accounting period. But, in any case, the views I have expressed make it right to limit the declaration to realization in Australia.

(2)

The second paragraph of the second declaration refers to s 28 of the Income Tax Assessment Act. As at present advised I am not prepared to hold that the shares were "trading stock" within the meaning of Div 2, sub-div. B, ss 28-31, though this does not necessarily mean that the principles of accounting embodied in those provisions are themselves altogether inapplicable. At the same time it is proper to remark that some of the facts of the case do suggest the possibility of a question whether the share manipulations of the taxpayer company ought to have been treated as a source of income before realization in money and, perhaps even then, whether they should have been so treated before a clear detachable surplus arose or a profit was acknowledged in a final manner (See Commissioner of Taxes (Vict) v Melbourne Trust Ltd, [1914] AC 1001 , at p 1011; Federal Commissioner of Taxation v Standard Trust Ltd (1933), 49 CLR 609 ; cf Federal Commissioner of Taxation v Thorogood (1927), 40 CLR 454 .)

(3)

The sixth ground of appeal seeks to have the value of the shares in the English companies brought into account at nil. The object is, of course, to throw as much of the profit as possible into England in the hope of securing exemption for it under s 23(q). On the view I have expressed this ground cannot be acceded to.

(4)

Upon the cross-appeal the only other matter calling for reference is ground (c) of which an amended text was handed up. The ground is rather pointed at a passage in the reasons of Rich J than to any part of his Honour's order. The use of the words "assessable income" in the declaration sought causes some difficulty, having regard to what follows, but, in any case, I think we ought to make no declaration upon the lines of this revised ground of appeal, the practical meaning and effect of which is not clear to me.

(5)

Lastly, the appellant complained of the exercise by the learned judge of his discretion in respect of costs. His Honour directed that there should be no order as to costs. In the view the learned judge took of the case, I cannot see why this was not an admissible view of what was just in respect of costs. Nor do I think that the variations of the decree that I would make should lead us to adopt a different view as to the costs of the hearing before Rich J. Moreover, I would allow the parties to abide their own costs of this appeal from his Honour's order.

I would make the following order:

(1)

By consent vary the first declaration in the order appealed from by substituting therefor the paragraph set out in ground (1) of the notice of appeal.

(2)

Vary the second declaration in the order by omitting the second paragraph thereof.

(3)

Vary the third declaration in the order by inserting the words "in Australia" after the word "realization" and before the words "of shares".

(4)

Vary the order by adding a seventh declaration to the effect that (a) the income or gain alleged to have arisen from the exchange mentioned in par 26 of the admissions of fact (Ex. B), of 124,498 shares in Great Boulder Mining & Finance Ltd for the same number of shares in Commonwealth Mining & Finance Ltd; (b) the income or gain arising from the surplus produced by the sale mentioned in par 34(i) of the said admissions of fact of shares in Commonwealth Mining & Finance Ltd and Great Boulder Mining & Finance Ltd; (c) the income or gain arising from the transaction mentioned in par 35 of the said admissions of fact; were derived by the appellant company from sources out of Australia within the meaning of s 23(q) of the Income Tax Assessment Act 1936.

(5)

Vary the order that the assessment be set aside and the consequent order for remission for re-assessment by substituting an order that the decision of the Commissioner upon the objections be set aside and that the objections be remitted to the Commissioner for re-consideration and re-determination conformably with this order.

Otherwise subject to the foregoing variations confirm the order appealed from and dismiss the appeal and cross-appeal.

No order as to the costs of the appeal and cross-appeal.