Madad Pty. Limited v. Federal Commissioner of Taxation.Judges:
Full Federal Court
Fox, Fisher and Beaumont JJ.
This appeal from a decision of the Supreme Court of Queensland [reported at 84 ATC 4115] (Kelly J.) concerns the question whether a penalty imposed on the taxpayer under sec. 76 of the Trade Practices Act 1974 for a breach of sec. 48 of that Act is deductible by it under sec. 51 of the Income Tax Assessment Act 1936.
The sections of the Trade Practices Act referred to are as follows:
``48. A corporation or other person shall not engage in the practice of resale price maintenance.''
[The particular acts which constitute the practice of resale price maintenance are set out in sec. 96(3).]
``76(1) If the Court is satisfied that a person -
- (a) has contravened a provision of Part IV;
- (b) has attempted to contravene such a provision;
- (c) has aided, abetted, counselled or procured a person to contravene such a provision;
- (d) has induced, or attempted to induce, a person, whether by threats or promises or otherwise, to contravene such a provision;
- (e) has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of such a provision; or
- (f) has conspired with others to contravene such a provision,
the Court may order the person to pay to the Commonwealth such pecuniary penalty (not exceeding $50,000 in the case of a person not being a body corporate, or $250,000 in the case of a body corporate, in respect of each act or omission by the person to which this section applies) as the Court determines to be appropriate having regard to all relevant matters including the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission, and whether or not the person has previously been found by the Court in proceedings under this Part to have engaged in a similar conduct.
(2) Nothing in sub-section (1) authorizes the making of an order against a person not being a body corporate by reason that the person has contravened or attempted to contravene, or been involved in a contravention of, section 45D or 45E.
(3) If conduct constitutes a contravention of two or more provisions of Part IV, a proceeding may be instituted under this Act against a person in relation to the contravention of any one or more of the provisions but a person is not liable to more than one pecuniary penalty under this section in respect of the same conduct.''
[Section 48 lies in Part IV of the Act.]
Section 51(1) of the Income Tax Assessment Act is well known, but for convenience of reference we set it out:
``51(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.''
The appellant taxpayer was for some years prior to 1977 engaged in trade, principally in the manufacture of mattresses. In 1969 it had commenced to manufacture a certain type of mattress under licence and it sold them to retailers. In 1976 what was described in evidence as a ``price war'' developed, and a number of retailers reduced their mark-up on the mattresses to 10%. This margin was regarded by the managing director of the appellant as too low and he endeavoured to persuade the retailers to increase their mark-up, and hence their prices. The action taken to this end came to the notice of the Trade Practices Commission and action was taken in January 1978 for breaches of sec. 48 alleged to have occurred in or about March 1977. Three of the allegations were admitted. They were to the effect that the taxpayer had attempted to induce a named retailer not to sell the mattresses at a price less than that specified by the taxpayer (see sec. 96(3)(b)). Convictions were recorded and penalties imposed of $7,000 on each charge.
Kelly J. made the following comments and finding [at ATC p. 4116]:
``The learned Judge who heard the matter accepted that the conduct had been engaged in by the appellant in the belief that such conduct would be in the interests of all concerned in the industry including the financial interests of the appellant. In his evidence before me, Mr. Dyer said that when he made the decision to do whatever was done he was not aware that it was a breach of the Act and as there is no evidence which would suggest otherwise I am prepared to accept that this was the case.''
Section 77 of the Trade Practices Act provides that the Minister (i.e. the Attorney-General) or the Trade Practices Commission may institute a proceeding ``for the recovery on behalf of the Commonwealth of a pecuniary penalty referred to in section 76'', and sec. 78 in effect provides that criminal proceedings do not lie. It is established that mens rea is not necessary in order to prove contravention of a provision of Pt. IV of the Act. That part is entitled ``Restrictive Trade Practices''.
There is no case which, in point of decision, governs the present question. There are,
ATC 4741however, a number of dicta, not least in the High Court, which assist in its resolution.
I.R. Commrs. v. Warnes & Co. Ltd. (1919) 2 K.B. 444, a penalty was imposed by a Court on a trader for breach of orders and proclamations concerning customs export procedure. Costs were incurred in defending the proceedings. Deductions for these amounts were disallowed, but an appeal to the General Commissioners was successful. The surveyor of taxes appealed to the Court. Rowlatt J. characterised the liability, which arose under the Customs (War Powers) Act 1915, as being of a ``penal character''. In referring to the terms of the English legislation he said (p. 452): ``... it seems to me that a penal liability of this kind cannot be regarded as a loss connected with or arising out of a trade''. It would seem that the costs incurred were treated as being as one with the penalty. His Lordship was of course very experienced in revenue matters. His decision should be seen in the light of the argument for the taxpayer, submitted by the Honourable W. Finlay Q.C., which can usefully be studied in full. We set out three passages:
``The penalty and costs were the direct result of the carrying out by the respondents of a business contract, under which they consigned the oil to Norway.''
``The respondents must, no doubt be assumed to have partially failed to have taken all reasonable precautions, but it was due to carelessness, and that was a business risk which every exporter to Scandinavia took.''
``Another illustration would be that of a bookmaker who incurred a fine for street betting. That would clearly be deductible as a loss incurred by him in carrying on his vocation. The question is, would an ordinary commercial man consider any particular expense as a loss or not?''
Sir Ernest Pollock had been stopped in chief, but a part of his submission in reply was as follows:
``They failed to take care which was necessary in order to keep their business and their trade within the limits and restrictions imposed by the municipal law, and they cannot deduct the fine as a loss incurred in that business which they never ought to have carried on in that manner, in breach of the restrictions imposed upon them by municipal law.''
Although the decision was one on legislation significantly different from sec. 51, it is evident that it was based on rather broad considerations related to the penal nature of the loss (or ``outgoing'').
A later decision of Rowlatt J., raising again the question in Warnes (supra), was taken on appeal to the Court of Appeal (
I.R. Commrs. v. Von Glehn (1920) 2 K.B. 553).
On the nature of the amount paid, again as a result of proceedings under the Customs (War Powers) Act 1915, Lord Sterndale M.R. there said (pp. 562-563):
``Now we had several authorities cited to us which seemed to establish that such proceedings as those are not technically criminal proceedings. I do not think that matters. They certainly are proceedings in which a penalty is being sued for by the Attorney-General as representing the Crown, for an infraction of the law, whether technically criminal for the purpose of appeal seems to me to be immaterial. The money which is paid is money paid as a penalty, and it does not matter in the least that the Attorney-General elected to take treble the value of the goods, nor does it matter that it may be called in the informations a forfeiture. It is in fact, under the section, a penalty.''
After referring to
Strong & Co. v. Woodifield (1906) A.C. 448, and considering the terms of the English legislation, he said (p. 566):
``It is perhaps a little difficult to put the distinction into very exact language, but there seems to me to be a difference between a commercial loss in trading and a penalty imposed upon a person or a company for a breach of the law which they have committed in that trading.''
Warrington L.J. said (p. 569):
``Now is the expenditure in this case a loss connected with or arising out of a trade or manufacture? That it arises out of the trade I think may well be conceded. It does arise out of the trade, because if it had not been that the company were carrying on the trade they would not have had to incur this expenditure; but, in my opinion, it is not a loss connected with or arising out of the trade. It is a sum
ATC 4742which the persons conducting the trade have had to pay because in conducting it they had so acted as to render themselves liable to this penalty. It is not a commercial loss, and I think when the Act speaks of a loss connected with or arising out of such trade it means a commercial loss connected with or arising out of the trade.''
He was of the view that the payment of the penalty was not ``made in any way for the purpose of the trade or for the purpose of earning the profits of the trade'' (p. 569). Scrutton L.J. confined himself closely to the particular legislation, as his final statement shows (p. 573):
``But on this particular question, whether in the case of these penalties imposed on the traders because they had so acted in exporting goods as to break the law, they can say that the penalties were paid for the purpose of earning profits or were expenditure necessary to earn the profits, I have no doubt that they cannot, and for that reason I think the appeal should be dismissed.''
The Court affirmed the decision in I.R. Commrs. v. Warnes & Co. Ltd. (supra).
Herald & Weekly Times Ltd. v. F.C. of T. (1932) 48 C.L.R. 113 was a decision under the Income Tax Assessment Act 1922-1929. The appellant had paid damages for defamation, and costs, and it was held that those amounts were deductible. They were ``wholly and exclusively laid out or expended for the production of assessable income'' (vide sec. 25(e)). Gavan Duffy C.J. and Dixon J. (two of the majority) said, at p. 119:
``The distinction between such a case as the present and Strong & Co. v. Woodifield (1906) A.C. 448, apart from any differences in the English and Commonwealth provisions, lies in the degree of connection between the trade or business carried on and the cause of the liability for damages.''
At p. 120 they dealt briefly with the cases to which we have been referring:
``The cases of I.R. Commrs. v. Von Glehn (1920) 2 K.B. 553, and I.R. Commrs. v. Warnes & Co. (1919) 2 K.B. 444, which decide that penalties imposed for breaches of the law committed in the course of exercising a trade cannot be deducted, are distinguishable for a somewhat similar reason. The penalty is imposed as a punishment of the offender considered as a responsible person owing obedience to the law. Its nature severs it from the expenses of trading. It is inflicted on the offender as a personal deterrent, and it is not incurred by him in his character of trader.''
Robinson v. Commr. of I.R. (N.Z.) (1965) N.Z.L.R. 246, Tompkins J. held, in reliance in part upon Warnes (supra), Von Glehn (supra) and Herald & Weekly Times Ltd. (supra), that fines imposed by the New Zealand Law Society Disciplinary Committee on a law practitioner were not a loss ``exclusively incurred in the production of the assessable income'' of the taxpayer. In the course of his judgment, his Honour said (p. 249):
``It is clear in my opinion that fines and penalties levied on a taxpayer by the Courts for breaches by him of the law are not deductible items.''
He went on to consider whether the fines levied in the case before him came within the same principle, and held that they did.
F.C. of T. v. Snowden & Willson Pty. Ltd. (1958) 99 C.L.R. 431 was a case concerning the deductibility of advertising expenses incurred in countering detrimental publicity. The question arose because the dissenting member of the Board of Review, which had heard the appeal at an earlier stage, had relied on the penalty cases by way of analogy. In the course of deciding the case, Dixon C.J. said (p. 437):
``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.''
Fullagar J., with whom Williams J. concurred, was of the same view. He expressed approval of the explanation given by Gavan Duffy C.J. and Dixon J. in Herald & Weekly Times (supra). Taylor J. simply said there was no analogy with the case where a penalty is imposed for breaches of the law committed in the course of a trade or business.
The facts in
Magna Alloys & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542; (1980) 49 F.L.R. 183 were closer to those of the present case. There it was held by a Full Court of this Court that legal expenses incurred by the taxpayer in (unsuccessfully) defending various criminal charges brought against its directors and agents were deductible under sec. 51 as being necessarily incurred in carrying on the taxpayer's business. The payment of penalties by a taxpayer was separately considered (see per Brennan J. at ATC pp. 4553-4554; F.L.R. p. 199 and Deane and Fisher JJ. at ATC p. 4563; F.L.R. p. 214).
In relation to penalties, Deane and Fisher JJ. made the following comments (at ATC p. 4563; F.L.R. pp. 214-215):
``It is somewhat difficult to understand how it can be maintained, as an unqualified proposition, that the nature of a penalty severs it from the expenses of trading. Recurrent penalties for parking infringements incurred by a delivery man and per diem penalties for unlawfully using premises for business or commercial purposes in contravention of zoning requirements are not, for example, logically severed from the expenses of trading. The same can be said of fines imposed for actually engaging in some unlawful activities, such as illegal bookmaking or soliciting, for the purpose of earning assessable income. If, when the matter directly arises for decision in the Australian courts, it is to be held that all fines and penalties are to be denied deductibility under the Act, it would seem preferable that it be on the basis of some perceived overriding consideration of public policy which precludes deductibility.''
Mayne Nickless Limited v. F.C. of T. 84 ATC 4458 Ormiston J. held that fines and penalties paid by the taxpayer were not deductible. The majority of the offences in respect of which the fines and penalties were paid were for parking infringements and the overloading of vehicles. The rest were for speeding, defective tyres, and a number of other offences. Some of the fines and penalties were imposed on the taxpayer itself, although the majority were imposed on its employees and third party contractors. In a full and careful judgment his Honour examined all the relevant authorities, including those to which we have referred, and the decision of Kelly J. now under appeal, which he did not regard as binding on him. His conclusion was that none of the outgoings were deductible. In relation to the fines imposed directly on the company and paid by it, he was of the view that he should follow what had consistently been said in the cases, up to and including Snowden & Willson (supra). We have set out most of the relevant dicta. In doing so he was influenced by the approach adopted in
Lunney v. F.C. of T. (1958) 100 C.L.R. 478. That case concerned the deductibility of amounts paid for fares to and from work. It was surprising that deductibility in such a common situation should have taken so long to come to the Courts. The High Court held that they were not deductible. Dixon C.J. was of the view that old authority, in England and Australia, had settled the matter against allowance, and that the situation should not be disturbed. His Honour said (pp. 485-486):
``The question having been agitated it became necessary to turn to the Australian authorities by which it was settled long ago. It was surprising to find how few they were and that they depended rather upon their persuasive authority than their imperative character. But the judgment of Judge Murray in
Re Adair (1898) 4 A.L.R. (C.N.) 42 was pronounced sixty years ago and the dicta of a'Beckett and Hodges JJ. in the Victorian Supreme Court in
Re Income Tax Acts (1903) 29 V.L.R. 298; 25 A.L.T. 110 implied the same view over fifty years ago. These views have remained unquestioned up till this case. The relevant provisions of the English Income Tax Acts are not in the same terms as those of the Australian law, but the whole course of English authority involves a like conclusion. To escape from the course of reasoning on which the decisions proceed requires the taking of refined and rather insubstantial distinctions. I confess for myself, however, that if the matter were to be worked out all over again on bare reason, I should have misgivings about the conclusion. But this is just what I think the Court ought not to do... If the whole subject is to be ripped up now it is for the legislature and not the Court to do it.''
McTiernan J. dissented in that case. In a joint judgment, Williams, Kitto and Taylor JJ. reached the same conclusion as Dixon C.J., but as a matter of construction of sec. 51(1).
In relation to amounts paid for fines and penalties imposed on employees and independent contractors, Ormiston J. was of the view that deductibility should be precluded on grounds of public policy. He said, in this connection (pp. 4473-4474):
``It follows in my opinion that the policy of the law should support the enforcement of the criminal law whether that be the historical common law of crime or the widening array of regulatory offences, and should strive to see that punishments for breaches of the law are not defeated or frustrated by direct or indirect means. About this there could be little argument.''
His reasoning would also support the conclusion he had reached in relation to fines imposed on the taxpayer itself.
In the present case the offences related to the manner of carrying on of the taxpayer's own business. The subject of the charges, that is to say, resale price maintenance, can fairly be regarded as central to its activities. It has been accepted that the taxpayer was not aware that it was infringing the Trade Practices Act, or any other legislation. However, what it did was contrary to one of the provisions of an Act designed to regulate commerce in the public interest. Although the contravention is not to be treated as a criminal offence, there are nevertheless heavy pecuniary sanctions for its observance. In addition, an action for damages will lie at the instance of a person who suffers loss or damage by reason of the contravention (sec. 82).
We are of the view that the deductions claimed should not be allowed. We place this decision on the basis of the acceptance in Snowden v. Willson (supra) of what was said in the cases we have referred to. The acceptance in the High Court, albeit by way of dicta, of the earlier dicta in England and in Herald & Weekly Times (supra) indicates in our view an approach to the construction of sec. 51(1) which we should follow.
The approach may well have its origins in public policy. In any event, it has been of long standing, and having in mind the application it must have had over many years, we should not disturb it, for reasons similar to those stated by Dixon C.J. in Lunney's case (supra).
A consideration which may be regarded as tending against this result is the deductibility of expenses incurred in conducting illegal activities. Starting price betting, or brothel-keeping, may be examples. The fact is, however, that the income from such sources is regarded as taxable (see
Minister of Finance v. Smith (1927) A.C. 193), and deductibility of expenses flows almost necessarily. Fines imposed for conducting these activities would not, however, be deductible.
We are of the view that the appeal should be dismissed, with costs.
THE COURT ORDERS THAT:
1. The appeal be dismissed.
2. The appellant pay the respondent's costs in the proceedings.