Federal Commissioner of Taxation v Levy
(1961) 106 CLR 44835 ALJR 581
(Judgment by: Owen J)
Between: Federal Commissioner of Taxation
And: Levy
Judges:
Kitto J
Dixon CJ
Taylor J
Owen J
Subject References:
Income Tax (Cth)
Judgment date: 8 November 1961
Judgment by:
Owen J
We have before us six appeals from orders made by Kitto J. In five of them his Honour dismissed appeals by the taxpayer against amended assessments in respect of his income for each of the five years ended 30th June 1950, 1951, 1952, 1953 and 1954. The sixth is an appeal by the Commissioner against an order made by his Honour allowing the taxpayer's appeal against an amended assessment made in respect of his income for the year ended 30th June 1955. The facts are that during these years the taxpayer was carrying on business in partnership with one Brice manufacturing food-preparing machines in Melbourne. Brice attended to the manufacturing side of the business and the taxpayer did the clerical work. The partnership books were at all times kept by a firm of chartered accountants, D.S. & R.M. Martin, who employed a man named Davison whose duty it was to keep those books. The practice was for the partnership to pay accounts rendered by suppliers of materials by cheques signed by the taxpayer and drawn on the partnership bank account, and it was the taxpayer's practice to enter the particulars of each cheque on the cheque butt. The cheque books were of the kind which contain two cheques on each page. At more or less regular intervals the cheque books were handed to Davison who kept an appropriate set of books of account. He would enter in the cash payments journal the particulars of the payments shown on the cheque butts, entering under suitable headings the purpose for which each cheque was drawn. One of these headings was "Purchases" and under it were entered from the cheque butts the amounts paid to suppliers of materials. From the books Mr. Martin, one of the principals, prepared the annual balance-sheets and the partnership income tax returns. From these in turn the taxpayer prepared his own income tax returns showing his share of the partnership profits. The partnership accounts were never audited, this being, in Mr. Martin's opinion, unnecessary having regard to the fact that no clerical employees were employed by the partnership. Davison, in whom everyone had full confidence, was, unfortunately, dishonest. From time to time he would take out of the cheque books a page containing two cheque forms and their butts in such a way that the fact that the cheques and butts were missing could be discovered only if it were noticed that there was a break in the sequence of the numbers of the butts remaining in the cheque books. Davison would then fill in the stolen cheque forms for sums payable to himself, forge the taxpayer's name and pay the cheques into his own bank account. He would enter in the cash payments journal the serial number of each of these stolen cheques and, under the head of "Purchases", show them as having been paid to one of the usual suppliers of materials to the partnership. No check was made to see whether the receipted invoices for materials supplied corresponded with the entries under "Purchases" in the cash payments journal, nor were the partnership bank statements compared with the cheque butts left in the cheque books. In the result Davison misappropriated moneys totalling approximately 93,000 pounds over a period of about eight years and did so without arousing suspicion. It follows that each year when the partnership balance-sheet was made up the expenditure shown under "Purchases" was considerably greater than the expenditure in fact incurred, and this in turn meant that the profit as shown in the partnership balance-sheet and the partnership income tax return was correspondingly reduced and the taxpayer's personal income tax return, being based on the partnership figures, understated his actual share of the partnership profits. In July 1955 two proprietary companies were formed by the partners, one to take over and conduct the manufacturing side of the business and the other to conduct the selling side. This necessitated the employment by the companies of a full time accountant who took over some of the work which had earlier been done by D.S. & R.M. Martin. In August 1955 the new accountant discovered Davison's defalcations and on the 23rd August 1955 Mr. Martin had an interview with the Deputy Commissioner of Taxation at which he told the latter what Davison had done and that as a result the income tax returns of the partnership and of each of the partners were incorrect and had understated the taxable income. The amount misappropriated by Davison was not then known but as soon as it was ascertained the information was supplied to the Department. For the years ended 30th June 1950, 1951, 1952, 1953 and 1954 and before Davison's defalcations had been discovered, assessments of the tax payable by the taxpayer, based upon the income shown in his returns, had been issued, and on the 2nd November 1956, after the true facts had been ascertained and communicated to the Deputy Commissioner, amended assessments were issued in respect of those years, based upon the income in fact received each year. The original assessment for the year ended 30th June 1955 was issued on the 28th March 1956, many months after Mr. Martin had informed the Deputy Commissioner of Davison's defalcations and of the resulting inaccuracies in the taxpayer's and the partnership returns. The appeal in relation to an amended assessment later issued for that year stands therefore on a different footing to the appeals relating to the earlier years and I will later set out some further facts relating to this amended assessment. (at p466)
The Commissioner's power to issue amended assessments is to be found in s. 170 and sub-s. (2) of that section provides that where a taxpayer has not made to the Commissioner a "full and true disclosure of all the material facts necessary for his assessment" and there has been an avoidance of tax the Commissioner may amend the assessment by making such alterations or additions thereto "as he thinks necessary to correct . . . a mistake of fact . . . ". Where the avoidance of tax is, in the opinion of the Commissioner, due to fraud or evasion, the assessment may be amended at any time, but in all other cases it must be made within six years from the date when the tax under the original assessment became due and payable. Sub-section (3) deals with the case in which the taxpayer has made a "full and true disclosure of all the material facts" and an assessment has been made after that disclosure. In such case no amendment of the assessment increasing the taxpayer's liability is to be made except to "correct . . . a mistake of fact" and no amendment is to be made in any event after the expiration of three years from the date on which the tax became due and payable under the original assessment. In none of the present cases does any question of fraud or evasion arise. Kitto J. found, and the fact is not questioned, that the taxpayer and the partnership accountants acted bona fide and in the honest belief, until Davison's misappropriations were discovered, that the figures shown in the partnership books and the income tax returns based upon those figures were correct. In each appeal, except the last one which relates to the year ended 30th June 1955, the Commissioner relies upon s. 170 (2) and claims that in respect of each of the years ended 30th June 1950, 1951, 1952, 1953 and 1954 the taxpayer did not make a "full and true disclosure of all the material facts necessary for his assessment". As to the appeal against the amended assessment for the year ended 30th June 1955, which Kitto J. upheld and which is now the subject of an appeal by the Commissioner, different considerations arise. Kitto J. found, and that finding is not questioned, that a "full and true disclosure of all the material facts" was made when Davison's defalcations were discovered and the facts made known to the Deputy Commissioner. But it is said on behalf of the Commissioner that a mistake of fact was made in the original assessment issued after that disclosure and that the amended assessment was issued later to correct that mistake of fact. (at p467)
Kitto J. was of opinion that in his returns for the years ended 30th June 1950-1954 inclusive, the taxpayer had not made a "full and true disclosure" of his financial position. In each of those years the partnership books and balance-sheets showed a figure for "Purchases" greatly in excess of the true figure which had been inflated by the inclusion of amounts misappropriated by Davison but entered by him in the books as purchases. It followed that the figure showing the profits of the partnership business was correspondingly reduced and, since the taxpayer's return showing his share of the partnership profits was based upon the partnership balance-sheet and return, his share of the partnership profits was shown at a lesser figure than it was in fact. The returns therefore did not "fully and truly" disclose all the material facts. The taxpayer had acted in the honest belief that he had disclosed the true facts but he and the accountants employed by the partnership had at all times in their possession the partnership books and accounts which, if they had been examined with care, would have disclosed the true position. The Commissioner had accepted as correct the taxpayer's figures as shown in his returns and had assessed tax accordingly. He had therefore made those assessments under a mistake of fact and was entitled to issue amended assessments under s. 170(2). I agree with his Honour's conclusion. The taxpayer had in fact understated his share of the partnership profits and I myself would have thought that on the true construction of s. 170(2) once it appears that a taxpayer's return upon which an assessment has been made contains an incorrect statement of a material fact necessary for the assessment and an assessment is made based upon that incorrect statement with the result that tax is avoided the Commissioner would be entitled to issue an amended assessment and that it would not be relevant to inquire whether or not the taxpayer knew or had the means of finding out that he had made an incorrect statement exce pt, of course, for the purpose of determining the further question whether any avoidance of tax was due to fraud or evasion. There are, however, some statements to be found in the cases suggesting that s. 170(2) should be given a more benevolent construction. In Federal Commissioner of Taxation v. Westgarth (1950) 81 CLR 396 a provision of the Commonwealth Estate Duty Assessment Act, similar to s. 170(2) was considered. Latham C.J. said that "a person cannot be said to fail to disclose something which he never knew" (1950) 81 CLR, at p 407 . Williams J. considered that a full and true disclosure was made if the person required to make it "discloses all that he knows or is capable of knowing" (1950) 81 CLR, at p 412 . And Fullagar J. thought that the use of the word "disclosure" involved "the idea of revealing something which is known to oneself" (1950) 81 CLR, at pp 415, 416 . In Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation (1950) 81 CLR 188 Williams J. again spoke of the duty to disclose as being a duty to disclose "every fact which he knows or is capable of knowing" (1950) 81 CLR, at p 198 , and in Foster v. Federal Commissioner of Taxation (1951) 82 CLR 606 Latham C.J. said that a failure by a taxpayer to tell the Commissioner a material fact which he, the Commissioner, already knew did not constitute a failure to disclose material facts (1951) 82 CLR, at p 615 . The expression "capable of knowing" used by Williams J. in Westgarth's Case (1950) 81 CLR 396 was thought by Fullagar J. in Australasian Jam Co. Pty. Ltd. v. Federal Commissioner of Taxation (1953) 88 CLR 23 to go too far if read literally. His Honour went on to say that "a merely inadvertent omission of a material fact may be enough to enable the Commissioner to maintain that the full and true disclosure required has not been made" (1953) 88 CLR, at p 33 . Finally in National Trustees Executors and Agency Co. of Australasia Ltd. v. Federal Commissioner of Taxation (1954) 91 CLR 540 Kitto J. spoke of the duty to disclose as not involving an obligation to disclose facts of which the Commissioner was already aware or facts which the person required to make the disclosure "does not know or believe or (perhaps) possess the means of knowing" (1954) 91 CLR, at p 589 . Some of the observations which I have quoted seem rather to treat the section as though it spoke of a "failure to make a full and true disclosure", but these are not its words. A "failure to disclose" does not seem to me to mean precisely the same thing as a "non-disclosure", and it might well be thought that there was no "failure to disclose" if the undisclosed fact was unknown to the person upon whom the duty of disclosure lay. (at p469)
For the purposes of the present case it is unnecessary to consider whether on its true construction s. 170(2) does not impose a wider duty of disclosure than some of these expressions of opinion suggest because I feel no doubt that here the taxpayer did not make a full and true disclosure. He did not disclose a most material fact, namely the correct amount of his share of the partnership profits, and he and those employed to keep the partnership books had at all times the means of ascertaining what the correct amount was. Accordingly I am of opinion that Kitto J. rightly dismissed the appeals by the taxpayer against the amended assessments for the years 1950-1954 inclusive. The taxpayer, although acting in good faith, did not make a full and true disclosure in his returns for those years and in making his assessments of tax on those returns the Commissioner undoubtedly acted under a mistake of fact. (at p469)
Turning then to the remaining appeal relating to the amended assessment for the year ended 30th June 1955 upon which Kitto J. found in favour of the taxpayer, the facts are that Mr. Martin's interview with the Deputy Commissioner after Davison's defalcations were discovered took place on 23rd August 1955. The partnership return and the taxpayer's return for the year in question were lodged on 21st February 1956 and in the partnership return a deduction of about 17,000 pounds was claimed. That figure represented the amount which Davison had misappropriated during the year of income and was claimed as a deduction under the head "Forgery Defalcation". This deduction reduced the figure shown as the partnership profits and the taxpayer's share thereof as shown in his return was proportionately reduced. Whether the deduction of 17,000 pounds shown in the partnership return should be allowed was being considered by the Department but the assessor whose duty it was to deal with the taxpayer's return was told by his superior that, although the partnership return was "under query", he was to accept the figures shown in the taxpayer's return as being correct and to assess the tax accordingly without waiting until it had been decided whether the deduction of 17,000 pounds shown in the partnership returns was to be allowed or disallowed. The assessor obeyed this instruction and an assessment was issued. Later the deduction claimed in the partnership return was disallowed, whether rightly or wrongly need not be considered in the particular circumstances of this case. Its disallowance meant that the net income of the partnership as shown in the return was increased and the taxpayer's share of that income was in fact higher than had been shown in his return. In these circumstances the Commissioner issued an amended assessment of the tax payable by the taxpayer, claiming to have made the original assessment under a mistake of fact and the question is whether s. 170(3) entitled him to do so. In my opinion it did not. All the material facts had been disclosed to the Commissioner months before and the partnership return was being considered in the light of those facts. Without awaiting the result of that consideration, the assessor dealing with the taxpayer's return was directed to assess the tax on the figures shown in it. In other words, the Commissioner elected to treat those figures as correct knowing full well what the true facts were and that in the light of those facts the figures might not be correct. That may have been done in the mistaken belief that if those figures turned out to be incorrect the Commissioner could avail himself of s. 170, but this was not a mistake of fact and s. 170(3) could therefore have no application. In my opinion Kitto J. rightly upheld the taxpayer's appeal against the amended assessment for the year ended 30th June 1955. (at p471)
In the result I am of opinion that all the appeals should be dismissed. (at p471)