J C Williamson's Tivoli Vaudeville Pty Ltd v Commissioner of Taxation
(1929) 42 CLR 452(1929) 36 ALR 14
(1929) 3 ALJ 276
(Decision by: Rich J.)
J C Williamson's Tivoli Vaudeville Pty Ltd
v Commissioner of Taxation
Judges:
Knox CJ
Isaacs J
Rich JStarke J
Judgment date: 7 November 1929
Decision by:
Rich J.
Reference from Board of Review in purported pursuance of the amendment introduced into the "Income Tax Assessment Act 1922-1927" by s 22 of Act No 32 of 1927. The amended assessment before the Board of Review was made in respect of the financial year 1926-1927. In view of subs (3) of s 32 of the Act of 1927, there may be some doubt whether the Board had power to make the reference in respect of an assessment of that year. But as the parties did not themselves raise the question, and as they have now agreed that the matter may be treated as an appeal from the Board of Review or the Commissioner, I do not feel called upon to consider it. The taxpayer complains that the Commissioner has disallowed a deduction of £17,000 claimed pursuant to s 25 (i) of the "Income Tax Assessment Act 1922-1925." This sum was arrived at by dividing an amount of £170,000, which the taxpayer claims to have paid as part of the consideration for an assignment of sub-leases, by the number of years of the unexpired period of the sub-leases at the date at which the consideration for their assignment was given. They were acquired by an agreement made between the vendor and a person who contracted for and on behalf of the taxpayer, by which it was agreed that the vendor "should sell and the taxpayer should purchase all the estate and interest of the vendor in the said sub-leases," and it was further agreed as follows: --
Part of the consideration for the said sale shall be the sum of one hundred and seventy thousand pounds, which shall be paid and satisfied by the allotment to the vendor or his nominees of one hundred and seventy thousand fully paid-up shares in the Company of one pound each.
The agreement was duly adopted by the Company and carried into effect, and the 170,000 fully paid shares of £1 each in the taxpayer were allotted to the vendor. The question following the language of the proviso of s 25 (i) is whether the taxpayer in this transaction has paid any and what amount for the assignment or transfer of a lease (it being assumed that the sub-leases were of premises used for the production of income). The transaction is of an ordinary character, and represents a customary method by which a company acquires assets by the use of its share capital. In a well-known passage in Ooregum Gold Mining Company v Roper, (1892) AC 125 at pp 136, 137, Lord Watson described the legal character of such a transaction. He said --
A company is free to contract with an applicant for its shares; and when he pays in cash the nominal amount of the shares allotted to him, the company may at once return the money in satisfaction of its legal indebtedness for goods supplied or services rendered by him. That circuitous process is not essential. It has been decided that under the Act of 1862, shares may be lawfully issued as fully paid up, for considerations which the company has agreed to accept as representing in money's worth the nominal value of the shares. I do not think any other decision could have been given in the case of a genuine transaction of that nature where the consideration was the substantial equivalent of full payment of the shares in cash. The possible objection to such an arrangement is that the company may over-estimate the value of the consideration, and, therefore, receive less than nominal value for its shares. The court would doubtless refuse effect to a colourable transaction, entered into for the purpose or with the obvious result of enabling the company to issue its shares at a discount; but it has been ruled that, so long as the company honestly regards the consideration given as fairly representing the nominal value of the shares in cash, its estimate ought not to be critically examined.
Section 25 of the English "Companies Act 1867," which is not part of the Victorian "Companies Act," provided that every share in a company should be deemed to have been issued and to be held subject to the payment of the whole amount thereof in cash, unless a contract in writing filed with the Registrar otherwise determined. In dealing with the question whether such transactions as this involved a payment in cash within the meaning of this provision, James, LJ, in Spargo's Case, LR 8 Ch 407 at p 412, said --
In truth it appeared to me that anything which amounted to what would be in law sufficient evidence to support a plea of payment, would be a payment in cash within the meaning of this provision ... In Fothergill's Case, LR 8 Ch App 270, the bargain in effect was to give paid-up shares in satisfaction of the money which was to be paid for other shares. But if a transaction resulted in this, that there was on the one side a bona fide debt payable in money at once for the purchase of property, and on the other side a bona fide liability to pay money at once on shares, so that if bank notes had been handed from one side of the table to the other in payment of calls, they might legitimately have been handed back in payment for the property, it did appear to me in Fothergill's Case (above), and does appear to me now, that this Act of Parliament did not make it necessary that the formality should be gone through of the money being handed over and taken back again; but that if the two demands are set off against each other the shares have been paid for in cash. If it came to this, that there is a debt in money payable immediately by the company to the shareholders, and an equal debt payable immediately by the shareholders to the company, and that each was accepted in full payment of the other, the company could have pleaded payment in an action brought against them, and the shareholder could have pleaded payment in cash in a corresponding action brought by the company against him for calls.
These authorities are conclusive to show that the obligations imposed upon the vendor or his nominee by the allotment of shares to satisfy the full sum of £170,000 was discharged. If the contract imposes upon the Company a liability for the sum of £170,000, which is to be satisfied by the agreed extinguishment of the cross demand for the sum of £170,000 (the consideration for the assignment of the sub-leases), not only is the discharge properly called a payment, but it also answers to the description of the Statute of payment in cash. It is true that in the Ooregum Case Lord Halsbury regretted that it should have been considered a payment in cash, but he had no doubt that it was a payment, and the other Lords seem to have had no qualms as to the authorities which treated it as a payment in cash. The Privy Council, in Larocque v Beauchemin, (1897) AC 358 at pp 365-6, fully approved of the passage cited -- see also North Sydney Investment Company v Higgins, (1899) AC 263 at p 273. It is not clear, however, that the contract should be interpreted as imposing an immediate obligation upon the Company to pay £170,000, and then providing for a mode of satisfying this liability. Similar, although not identical, provisions in other contracts have been interpreted as imposing upon the company, not a money liability, but an obligation to satisfy a money sum by the issue of shares -- see Rosherville Hotel Company, (1890) 2 Megone 60; and Re Gibson, Little and Co, (1880) 5 LR Ir. 139 at pp 155-6. But this interpretation would only mean that the transaction did not satisfy the expression "payment in cash." The discharge of the sum of £170,000 would nevertheless, in my opinion, satisfy the expression "paid an amount" in s 25 (i) of the "Income Tax Assessment Act 1922-25." Many cases can be cited from other branches of the law which show that it is a payment.
Two interesting cases arising from the old law which did not allow of variance in pleadings are well stated in Selwyn's Nisi Prius (2nd ed ), at p 656 --
The plaintiff declared in assumpsit -- Brown v Fry, Devon. Summ. Ass. 1808 M.S -- that in consideration that the plaintiff had bought of the defendant a horse for so much money, the defendant warranted the horse to be sound. In proof of the plaintiff's case a receipt, which had been given by the defendant, was produced, purporting to be a receipt of so much money, for a horse warranted sound. On cross-examination of the witness who produced the receipt, it appeared that the plaintiff had given a mare as well as a sum of money in exchange for defendant's horse. It was objected that there was a variance; but Graham, B., was of a different opinion, observing that the receipt admitted that the defendant had taken the mare as money. So where the declaration stated -- Hands v Burton, 9 East. 349, recognised in Saxty v Wilkin, 11 M. & W. 622 -- that in consideration that the plaintiff would buy of the defendant a horse for £31 10s. to be paid by the plaintiff to the defendant, the defendant promised that the horse was sound; and that the plaintiff did buy of the defendant the horse for that price, and did pay to the defendant the said £31 10s., and then alleged as a breach that the horse was unsound; it appeared in the proof that the defendant agreed to dispose of his horse, which he warranted sound, to the plaintiff, for thirty guineas, but agreed, at the same time, that, if the plaintiff would take the horse at that value, he, the defendant, would purchase of the plaintiff's brother another horse for fourteen guineas, and that the difference only should be paid to the defendant. The witness described it as one deal between the parties, and that, but for the latter consideration, he did not believe that the bargain would have been made. It was, therefore, objected, that the proof varied from the contract as laid, and showed rather a contract for the exchange of horses, paying the difference only in money, than an entire money payment for the horse in question. But the court overruled the objection, Lord Ellenborough, C.J, observing that the parties agreed to consider the brother's horse as fourteen guineas, in their mode of reckoning the payment for the defendant's horse; but still the consideration for the latter was thirty guineas, and the defendant received thirty guineas in money and value.
In Hart v Nash, 2 C.M. & R 337, and Hooper v Stephens, 4 A. & E. 71, it was decided that if the goods are accepted as payment or anything is received upon agreement in reduction of a debt, that is a payment sufficient to take a debt out of the Statute of Limitations; and so too Halsbury's Laws, Vol VII., p 444, says --
Payment need not necessarily be made in money; thus the delivery of goods which are taken by the creditor in satisfaction of the debt is equivalent to payment -- Hands v Burton (above) ; Saxty v Wilkins (above); Smith v Battams, (1857) 26 LJ (Ex) 232; and a settlement of accounts by which items on one side are agreed to be set off against items on the other side amounts to payment of the sums stated in the account.
See also Wilkins v Casey, 7 T.R 711, followed in Cannan v Wood, 2 M. & W. 465; Maillard v Duke of Argyle, 6 Man. & G. 40 at p 45, cited in Australian Mercantile, etc, Co v Commissioner of Taxation, (1929) 35 ALR 160 at p 162.
For these reasons I am of opinion that the Company paid within the legal meaning of that expression an amount of £170,000 for the assignment of the subleases. Section 25 (i) of the "Income Tax Act 1922-1925" is concerned with what the taxpayer has paid, not with what he ought to have paid. In this case the taxpayer is a Company, and in all its accounts it must be taken to have expended £170,000 out of its share capital in the acquisition of the sub-leases. If it can be shown that the directors have, in breach of the Company law, accepted an asset of less value than this in discharge of this contribution of capital, they can be dealt with and the Company recouped, but until this is done it seems no concern of the Commissioner unless the transaction was devised to avoid tax. But if this were the case the Commissioner could disregard the transaction by availing himself of the provisions of s 93 of the "Income Tax Act." It is right, however, to point out that
when shares have been issued as paid up, upon the footing that certain specified property shall be accepted by the company as the consideration for such issue, the court will not, whilst the contract stands, inquire as to the value of the consideration even at the instance of a liquidator
-- Palmer's Company Precedents (12th ed ), Vol I., and cases cited pp 58-59.
I therefore am of opinion that the allotment to the said Musgrove of 170,000 fully paid-up shares in the taxpayer Company of £1 each in pursuance of the said agreement was a "payment of a fine, etc, for the assignment, etc, of a lease within the meaning of s 25 (i) of the Income Tax Assessment Act 1922-1925." This answers the first question.
I adhere to the view which I expressed in Australian Mercantile Land and Finance Co Ltd v The Federal Commissioner of Taxation (ubi supra), that -- "The satisfaction of a definite pecuniary sum due to the assignee of the lease seems to me fairly to come within the meaning of the words 'payment of an amount' used in para (i) of s 25." I must not be taken as deciding that in s 25 (i) of the "Income Tax Act" payment has no wider meaning than this. Before such a conclusion is arrived at it will be necessary to consider various sections in the Act relating to money and payments possibly in a loose sense.
The second question appears to inquire whether the taxpayer has thrown upon him the burden of "demonstrating" what the market value of the shares was. In the view I have taken the answer is, of course, No.
My answer to the third question is that the paid-up value of the shares is the measure of the amount of the payment.