Between: Federal Commissioner of Taxation
And: Snowden & Willson Pty Ltd

Judges: Dixon CJ
Williams 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

MELBOURNE

Decision by:
Taylor J

In the income year ended 30th June 1953 the respondent company, which had then been engaged in Western Australia for a number of years in the building trade, expended the sum of PD4,252 for legal and other costs incurred by it in connection with its representation in proceedings before a Royal Commission which was appointed to inquire into some aspects of its trading activities. The precise ambit of the inquiry directed by the terms of the commission is of importance in the case but it would be out of place at this stage to endeavour to indicate in a few words the substance of the matters into which the commission was directed to inquire.

In its return of income for the relevant year the respondent sought to deduct the item of expenditure mentioned for the purpose of arriving at its taxable income but the deduction was disallowed by  the appellant. Upon appeal to a board of review the respondent's objection to the commissioner's assessment was allowed and, by a majority, the appeal was upheld. The present appeal is now brought by the appellant in an attempt to restore his assessment.

The problem in the case arises in relation to the familiar words of s. 51 (1) of the Income Tax and Social Services Contribution Assessment Act 1936-1953 which in broad terms, defines the general classes of expenditure which constitute allowable deductions for the purposes of the Act. In terms, the sub-section provides as follows: "(1) 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 such income, shall be 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."

It will be seen that the majority decision of the board of review involved the twofold conclusion that the expenditure in question was incurred in gaining or producing the respondent's assessable income or necessarily incurred in carrying on its business for the purpose of gaining or producing that income and that the expenditure was not of a capital, private or domestic nature. Subject to one minor qualification to which reference will be made later there was no serious challenge to the relevance of the expenditure to the business operations of the respondent; indeed, those business activities and the manner in which they were conducted were, as the facts show, the very things which created the situation which led to the appointment of a Royal Commission and although the expenditure was not, by itself, calculated to produce assessable income (cf. Herald & Weekly Times Ltd  v  Federal Commissioner of Taxation ^[F48] ) it is readily recognizable as an expenditure which was "incidental and relevant to the operations or activities regularly carried on for the production of income". (Amalgamated Zinc (De Bavay's) Ltd  v  Federal Commissioner of Taxation, ^[F49] at pp. 307, 309, 310; and W. Nevill & Co  Ltd  v  Federal Commissioner of Taxation, ^[F50] at p. 305.) But this does not necessarily mean that the expenditure was not of a capital nature and the question whether or not it should be so regarded was the principal matter debated upon the appeal.

This question cannot, of course, be answered without an adequate appreciation of the circumstances in which the expenditure was incurred and it is convenient to turn to the facts of the case at once. The general nature of the company's business and the manner in which its activities were conducted are briefly described in the statement of facts agreed upon by the parties. It was, in fact, carrying on business in the manner described when on 12th December 1952, a Royal Commission was appointed "to inquire into and report upon allegations against Snowden & Willson (Housebuilders) Proprietary Limited"-"(1) made or referred to in the speeches, as reported in HANSARD, of Mr. E. P. Oldfield, M.L.A., in the Legislative Assembly on 17th September and 22nd October, 1952, or (2) made to the Commission by any purchaser of land from, or through the agency of either such Company in relation to-(a) any one or more of the terms of the contract of sale relating to the land; (b) the circumstances leading to the making of the contract or under which the contract was entered into  or performed, including any inducement, representation, demand or request made to the purchaser, whether concerning money, documents, papers or otherwise; (c) money charged to the purchaser under, arising out of or connected with the contract or the land or any erection on or work done to the land,  including 'extras'." Some weeks later the ambit of the inquiry was extended to include allegations against the respondent-"(3) made to the Commission by any person obtaining loans from or through the agency of such company for the purpose of financing the purchase of or erection on or work done to any land in relation to-(a) the moneys, costs and expenses charged to such person in respect thereof; (b) the circumstances leading to the making of any such loan, including any inducement, promise, representation, demand or request made to such person, whether concerning money, documents, papers, or otherwise." Two things may be said at once concerning the terms of the Royal Commission. The first is that cl. (1) left much to be desired in the interests of precision and clarity and the second is that the remaining clauses left the ambit of the inquiry to be determined, in part, by the substance of any later allegations made to the commission itself. To say the least, the appointment of a commission to inquire into these matters produced a situation in which neither the commission nor the respondent could tell exactly what matters would be inquired into or where the inquiry would finish.

A perusal of the report in Hansard of Mr. Oldfield's speeches, who on 17th September 1952 moved for the appointment of a Select Committee, shows that he protested that he was "not making charges against the firm of Snowden & Willson but ... merely placing before the House facts given" to him by person who had had "business dealings and contractual relations with the firm in question". The result was that no charges against the respondent were precisely formulated though the respondent was subjected to a considerable amount of criticism concerning the manner in which it had carried on its business. This criticism-or the "allegations"-touched the manner in which the respondent made its contracts with its clients, the prices charged for dwellings erected by it, the charges made in particular cases for extras, the time taken by it for the erection of particular dwellings, the arrangements and adjustments insisted upon by the respondent upon settlement with its clients and a number of other minor matters which seem to have found no place in the proceedings of the Royal Commission. All in all, Mr. Oldfield's speeches seemed to indicate a general ex parte disapproval of the manner in which the respondent conducted certain of its business activities. But the most important of the allegations made by him related to the use made by the respondent in certain cases of the "rise and fall" clause which appeared in its building contracts and it may be said that this constitutes the main topic of the inquiry before the Royal Commission. From what appears in the case it seems that, although it may not have been possible to specify its precise limits, the inquiry which was directed was substantially concerned with allegations that a number of clients of the company had been overcharged in particular instances. It was on this basis that the inquiry proceeded and the  commission investigated, in all, thirteen cases. In each of seven of these cases the commission found that the secretary of the respondent, one W. E. Snowden, had falsely represented to the purchaser at the time of the execution of the relevant contract that the rise in costs of labour and material during the course of building operations would not exceed a few pounds, that in some cases this or some like representation had induced the purchaser to sign the contract and that, upon settlement, excessive amounts had been demanded and paid pursuant to the "rise and fall" clause. In two other cases it was found that excessive contract prices had been charged by the respondent whilst in the remaining four cases there were but minor matters for the consideration of the commission. It is unnecessary to refer in detail to the commission's findings in each particular case or to endeavour to indicate why it was thought that the prices charged by the respondent were excessive. Indeed, the findings themselves are of little consequence in this appeal; they are of importance only as an indication of the nature of the inquiry and its relation to the respondent's business activities. I also forbear to comment upon the commission's findings that the company "falsely represented" the extent to which labour and material costs would rise during particular building operations or concerning the recommendations which were finally made that "it should be made an offence for builders not to keep complete books and records" and that "the 'rise and fall' clause be abolished from contracts altogether". These are not matters for our consideration though, again, they may furnish some indication of the nature and substance of the inquiry.

This brief statement of the circumstances in which the Royal Commission  was set up describes also the occasion for the expenditure which is now in question. For the appellant it is, of course, claimed that the circumstances indicate that the expenditure was of a capital nature. As I understand the argument it is asserted that the expenditure was incurred by the respondent, if not to preserve itself from extinction, then to protect the goodwill of its business and the "profit-making structure" from injury. No one would be concerned to deny that if the respondent had made no attempt to combat the allegations which had been made it would have been highly probable that its goodwill would have suffered. Indeed, the respondent conceded that this would have been so. But it is one thing to say that unless a particular expenditure is outlaid the goodwill of a business will or may suffer and another to assert that this very circumstance alone will brand the expenditure, when made, as an expenditure of a capital nature for it is not only capital expenditure which is ultimately reflected in the value of the goodwill of a business since every step in the day to day operations of a business may tend to enhance, preserve, or destroy it. It may, I think, be said that the true character of the expenditure in question in this case is to be sought in a consideration of its immediate purpose as revealed by an appreciation of the occasion which was thought to call for it and of the circumstances in which it was made.

In the course of argument the case of  Morgan v  Tate & Lyle Ltd ^[F51] received some attention and it is as well to put that case aside before proceeding with our inquiry. In that case their Lordships were concerned with the question whether expenditure incurred by the taxpayer to combat the possibility of the seizure of its business by a process of what is called nationalisation was expenditure "wholly and exclusively laid out for the purposes of the company's trade". A majority of their Lordships held that it was and the case is no more and no less than an authority for this proposition; it is of no assistance in applying the provisions of s. 51 (1). So much is clear from a comparison of the two statutory provisions and it is put beyond any question by the pointed distinction made by their Lordships between that case and the decision in Ward & Company Ltd  v  Commissioner of Taxes ^[F52] where the critical words prohibited the deduction of expenditure "not exclusively incurred in the production of assessable income". These, again, are words which differ from those contained in s. 51 (1) and neither case is of any real assistance in solving the problem before us.

If, however, the facts of the present case were analogous to those in Ward's Case ^[F53] there could be little doubt that, upon authority, we would be bound to hold that the expenditure was of a capital nature. But they are not. On the contrary, an examination of the amorphous terms of the Royal Commission, reveals, at least, that the contemplated inquiry was concerned with complaints respecting particular trading activities of the respondent, with the possibility of affording relief to the so-called victims and, perhaps, with the desirability of placing restrictions upon some of the business practices employed by the respondent. There is nothing to suggest that the business of the respondent was faced with the prospect of annihilation either wholly or in part. Perhaps, it may be said that, at the most, it was faced with an inquiry into allegations which might have founded claims against it arising out of and in relation to certain dealings from which part of its income was derived. The cost of resisting such claims in the ordinary courts of law would, of course, constitute a revenue expense and it is difficult to see why any different conclusion  should be reached merely because a special tribunal was empowered to investigate and report. The uncertainty of what might follow the report of the Royal Commission-either in the way of legislative action or judicial proceedings-led the appellant to suggest that the case was not unlike Ward's Case ^[F54] that is to say, that the company was, in effect, "fighting for its existence". But there is not the slightest reason to suppose that this was so; the inquiry, in substance, was an inquiry into more or less specific complaints by individuals that they had been unfairly treated in their business relations with the respondent and the ultimate goal could not have been said to lie beyond the provision to them of some form of relief and some regulation of trade practice to prevent possible abuses in the future. Upon this view of the facts the case is quite unlike Ward's Case ^[F55] and clearly distinguishable from Broken Hill Theatres Pty  Ltd  v  Federal Commissioner of Taxation ^[F56] where the purpose of the expenditure by the taxpayer was to secure for itself freedom from further competition in the locality where it carried on business. The case more closely resembles Sydney Ferries Ltd  v  Commissioner of Taxation (N.S.W.) ^[F57] where the taxpayer incurred an expenditure for representation before a Royal Commission appointed to inquire into the constitution, business and operations of the company and to determine whether certain increases in fares were justified. In all the circumstances, I am of the opinion that the expenditure in question was not of a capital nature and that the deduction was rightly claimed.

The final observation which I wish to make is concerned with the argument that, as the expenditure was incurred in an endeavour to rebut the charges of fraud which  were implicit in the allegations made by Mr. Oldfield, the company is not entitled to the deduction claimed. It was sought to support this argument by reference to cases concerned with legal costs and penalties incurred in criminal proceedings. It is, I think, sufficient to say that there is no analogy between the two classes of cases and, accordingly, that there is no substance in this submission. (See Inland Revenue Commissioners v  Warnes & Co; ^[F58] Commissioners of Inland Revenue v  von Glehn & Co  Ltd; ^[F59] Minister of Finance v  Smith, ^[F60] at pp. 197, 198.)

For the reasons given the appeal should be dismissed.