Guinea Airways Ltd v Federal Commissioner of Taxation
(1950) 83 CLR 584 (Dixon J - 22 December 1949 - (decision appealed))[1950] HCA 60 (Dixon J - 22 December 1949 - (decision appealed))
(1950) 83 CLR 584 at 588 (Full Court - 13 November 1950)
[1950] ALR 913 (Full Court - 13 November 1950)
(Judgment by: Kitto J)
Between: Guinea Airways Ltd
And: Federal Commissioner of Taxation
Judges:
Dixon J (decision appealed)
Latham CJ
McTiernan J
Webb J
Fullagar J
Kitto J
Judgment date: 22 December 1949 (Dixon J); 13 November 1950 (Full Court)
Judgment by:
Kitto J
The appellant company carried on an air transport business and had a base at Lae. It established there a considerable stock of spare parts for its aircraft and of general stores, for it was common practice and essential for the efficient conduct of the business to have such goods available for immediate use when the occasion demanded. The bombing of Lae by the Japanese on 21st January 1942 resulted in the destruction of these stocks, which at that time stood in the company's books at the amount of their cost price. In respect of the loss thus incurred the company became entitled to receive compensation under the National Security (War Damage to Property) Regulations. The difference between the cost price of the goods destroyed and the compensation recoverable from the War Damage Commission was 5,791 pounds in the case of the spare parts, and 192 pounds in the case of the general stores. The aggregate of these sums, 5,983 pounds, the company claimed to be an allowable deduction in the assessment of its income tax in respect of income derived during the accounting period ending 28th February 1942. The claim was disallowed by the commissioner, and an appeal from the disallowance was dismissed by Dixon J.
The company's main contention was that the loss of 5,983 pounds was an allowable deduction under s. 51(1) of the Income Tax Assessment Act 1936-1942. The commissioner considered, and Dixon J. agreed, that the loss of 5,983 pounds was a loss of capital, or of a capital nature, and was therefore excluded by the express terms of s. 51(1) from the category of deductions which that sub-section makes allowable.
The losses to which s. 51(1) applies are gross losses, not net losses; and if any deduction is allowable under that section in respect of the destruction of the spare parts and general stores it must be, I should think, a deduction of their cost price, and the war damage compensation should be included in assessable income. At least it is clear, I think, that unless the compensation is a receipt on revenue account, the loss consisting of the difference between the compensation and the cost price of the goods destroyed cannot be a loss of an income nature. It is useful, therefore, to consider whether the compensation is a revenue receipt. Now, although some goods comprised in the stock of general stores appear to have been sold on occasions, it is clear that the company was not engaged in trading in such goods. The case is in this respect the converse of J. Gliksten & Son, Ltd. v. Green [1929] AC 381 , in which it was held by the House of Lords that moneys received by a company under a policy of insurance in respect of the destruction of timber by fire constituted a trading receipt. The reason was that the timber was trading stock which it was the company's business to turn into cash. As Lord Hanworth M.R. expressed it in the Court of Appeal [1928] 2 KB 193 , at p 202 :-
"A sum has been received in respect of the timber. That amounts to a restoration to the circulating capital of a sum which had previously been invested in specie in timber."
The contrary is the case where assets are destroyed which are not trading stock; the receipt of insurance moneys or compensation in respect of their destruction is not a restoration of circulating capital and, in my opinion, is not a receipt on revenue account. It seems to me to follow that the loss in respect of which the insurance moneys or compensation become receivable is a loss of a capital nature.
In this case it is clear that it was not circulating capital that was destroyed. If a new propeller blade had been affixed to one of the company's aircraft by way of replacement immediately before the Japanese attack, the destruction of the new blade together with the aircraft would clearly have meant a loss of a capital nature. The position cannot be different because the blade was destroyed while still among the company's stock of spare parts.
The truth appears to me to be that the spare parts and stores represented an investment of capital moneys. The goods had been acquired before they were actually needed, so that no time would be wasted in getting them when the need for them arose. In this sense they were held in reserve, just as money for the purchase of spare parts when needed might have been kept in a bank or in a safe. If money so kept had been lost, e.g., by the failure of the bank or the destruction of the safe, the loss could not be regarded as other than a capital loss.
In argument it was suggested that the principle of Commissioner of Taxation v. Commercial Banking Co. of Sydney Ltd. (1927) 27 SR (NSW) 231 ; 44 WN 65 might be applied. In that case, as in Punjab Co-operative Bank Ltd., Amritsar v. Commissioner of Income-Tax, Lahore [1940] AC 1055 , the question considered was the nature of a profit made upon a change of investment of moneys held by a bank to be available as a "second line of defence" should the exigencies of its business make it necessary to resort to them, and it was held that the profit was of an income nature. There is a superficial resemblance but a fundamental difference between such a case and the present. In the case of a banker, money is his stock in trade, and any profit or loss he makes in dealing with money in the course of his business is on revenue account, notwithstanding that the money is in a sense held in reserve. In a case such as the present, however, money is not stock in trade, and neither are spare parts and stores bought with it; and if either money or goods be lost while held as a fund or stock to meet future needs, the loss is a loss on capital account.
In my opinion the company's contention based upon s. 51(1) was rightly rejected.
A second contention advanced by the company was that the loss was made an allowable deduction by s. 59. I agree with Dixon J. in thinking that it is a sufficient answer that s. 59 could not apply unless the spares or stores were, within the meaning of s. 54, used by the company during the relevant year for the purpose of producing assessable income or had been installed ready for use for that purpose, and that plainly they were not so used and cannot properly be described as having been installed.