Federal Commissioner of Taxation v Snowden & Willson Pty Ltd
99 CLR 431(Judgment by: Dixon CJ)
Between: Federal Commissioner of Taxation
And: Snowden & Willson Pty Ltd
Judges:
Dixon CJWilliams J
Webb J
Fullagar J
Taylor J
Subject References:
Taxation and revenue
Income tax
Allowable deductions
Money spent on advertising and legal representation
Legislative References:
Income Tax and Social Services Contribution Assessment Act 1936 (No 27) - s 51
Judgment date: 15 May 1958
MELBOURNE
Judgment by:
Dixon CJ
The question for decision is whether the taxpayer is entitled to a deduction from its assessable income for the year of income ended 30th June 1953 of an amount expended by the company in an attempt to meet by advertisements certain attacks made in the Legislative Assembly of Western Australia upon the conduct of its business and in its appearance by counsel before a Royal Commission subsequently appointed to inquire into the charges and any further complaints or allegations made to the commissioner by persons who had dealt with the company.
The company carried on a business which included the speculative building of houses for customers on terms. The business covered the work of an estate agent, insurance agent and the kind of things associated with such enterprises. What, perhaps, is more material for present purposes is its business in building for its customers. The company would build for a customer owning the site or it would contract to sell him the site and to build the house. The transaction would in each case be upon terms. It is unnecessary to enter upon the details of the complaints made in the Legislative Assembly, or elsewhere, of the company's methods. It is enough to say that they reflected on the integrity of those conducting the company's business and upon the fairness of the transactions to the customers and the sufficiency of the disclosure to them of the operation of the terms.
The company's methods were attacked in the Western Australian Assembly in September 1952, the Royal Commission was appointed in December 1952 and it sat for some thirty days in January, February and March 1953, and made its report (which was by no means favourable to the taxpayer company) on 27th April 1953. The taxpayer began by expending a sum on advertising to counter the effect produced by the reports in the press concerning the charges made. The cost of this was about PD637. Then the taxpayer company proceeded to defend itself and its officers before the Royal Commission. This involved fees for counsel, solicitors, valuers, surveyor and accountants. The total cost, including the advertising, was PD4,252. That amount the taxpayer sought to deduct from the assessable income in the assessment for the year in question. The deduction was disallowed by the commissioner but an appeal by the taxpayer was upheld by the majority of a board of review. An appeal was instituted to the High Court and referred to the Full Court by Kitto J.
This is the proceeding now before us.
The question whether this sum or any part of it may be deducted depends, of course, upon s. 51 (1) of the Income Tax and Social Services Contribution Assessment Act 1936-1953. In Ronpibon Tin N. L. and Tongkah Compound N. L. v Federal Commissioner of Taxation, [F1] at pp. 55-57 this Court discussed the provision pointing out the distinction between the manner in which it is constructed and the manner in which s. 23 (1) (a) and s. 25 (b) of the Income Tax Assessment Act 1922-1934 combined in operation. The judgment of the Court also distinguished between the two parts of the first limb of s. 51 (1). The first part deals with losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income; the second deals with losses and outgoings to the extent to which they are necessarily incurred in carrying on a business for the purpose of gaining or producing such income.
It is suggested in the case mentioned [F2] that the expression in the second part "in carrying on a business for the purpose of gaining or producing" lays down a test that is different from that implied by the words "in gaining or producing". The passage proceeds: "But these latter words have a very wide operation and will cover almost all the ground occupied by the alternative. The words 'such income' mean 'income of that description or kind' and perhaps they should be understood to refer not to the assessable income of the accounting period but to assessable income generally. If they were so interpreted, they would cover a case where the business had not yet produced or had failed to produce assessable income ..." [F3] . This view, although expressed tentatively, appears to me to be right and to state the effect of that part of the provision correctly.
If it were not for the word "necessarily" there would be no difficulty, in my opinion, in treating the expenditure in the present case as coming within the conception expressed by this part of s. 51 (1). In saying this I am pronouncing upon a question of fact rather than of law. But, as it appears to me, the carrying on of the business of the nature described brought with it the attacks against which the taxpayer company sought to defend itself. The attacks touched its business nearly; they disparaged the methods by which it was conducted; they were calculated to deter intending or likely customers from dealing with it and to destroy the faith of existing customers in their current relations with the company. No doubt it would be instinctive in the business man or, perhaps, in any man, to defend himself and those associated with him in business against an attack of such a description on the manner in which they were pursuing their business activities. But the instinct is founded upon sound if intuitive conceptions of what must be done if they are not to suffer in their pursuit of custom and profit. Whether on the merits they were in a position to defend themselves successfully or whether, on the other hand, the attacks upon them lacked adequate foundation alike seem to me to be matters not to the point.
The case does not appear so far as the element now under consideration goes to depend upon case law or upon anything but an understanding of what in fact and according to the ordinary conduct of affairs is incidental to the conduct of a business. The word "necessarily" does, however, seem to me to require consideration. Clearly its operation is to place a qualification upon the degree of connection between the expenditure and the carrying on of the business which might suffice in the absence of such a qualification. In The Commonwealth and The Post-Master-General v Progress Advertising & Press Agency Co Pty Ltd [F4] Higgins J. supplied an interpretation of "necessary" as not meaning essentially necessary but as meaning appropriate, plainly adapted to the needs of a department carrying out an Act. [F5] That was in another connection but the phrase was availed of by the Court in the Ronpibon Tin Case, [F6] at p. 56 as throwing light on the use of the word "necessarily" in s. 51 (1). Clearly the expression is used in relation to business. Logical necessity is not a thing to be predicated of business expenditure. What is meant by the qualification is that the expenditure must be dictated by the business ends to which it is directed, those ends forming part of or being truly incidental to the business.
In the present case it appears to me that the taxpayer company could do nothing else but defend itself, if it was to sustain its business and continue carrying it on in anything like the same volume or according to the same plan. That seems to me to be enough.
There is no analogy here to cases in which fines or penalties are incurred. There the character of the expenditure and the reasons why the law imposes a fine or penalty separate the expenditure from the conduct of the business. It is not to the point that the conduct penalised found its motive in business considerations. Nothing of the kind can be said of the expenditure now under consideration nor is any principle of public policy affected by allowing the deduction.
There remains, however, the question whether the expenditure may not be considered to be of a capital nature and so subject to the express prohibition contained in s. 51 (1) against allowing losses and outgoings of a capital nature.
An examination of the facts does not support the view that the proceedings in Parliament and before the Royal Commission imperilled the existence of the business or the capital assets of the company. The proceedings were not necessarily directed at a winding-up of the company or a stoppage of the business. Precise definition or distinctions are difficult in such an affair. But what the company had most to fear was the embarrassments in the present and future conduct of its business and, no doubt, a decline in its custom.
There is no satisfactory ground for saying that the expenditure was an affair of capital.
The appeal from the decision of the board of review should be dismissed. The appellant commissioner should pay the costs, including the costs of the proceedings before Kitto J.