All States Frozen Foods Pty. Limited v. Federal Commissioner of TaxationJudges:
Full Federal Court
Bowen C.J., Lockhart and Gummow JJ.
This is an appeal from that part of the judgment of a judge of this Court (Davies J.) in which his Honour held that as at 30 June 1985 goods to the value of $1,170,193 were trading stock on hand of the business of the appellant (``the taxpayer'') [reported at 89 ATC 5135]. The matter came before Davies J. as an appeal from the Administrative Appeals Tribunal (``the Tribunal'') on a question of law, pursuant to sec. 44 of the Administrative Appeals Tribunal Act 1975 (``the AAT Act'').
The taxpayer had been successful before the Tribunal upon its objection concerning the extent to which the cost of goods in transit was to be taken into account in calculating the taxable income of the taxpayer for the year of
ATC 4176income ended 30 June 1985. Davies J. decided that the decision of the Tribunal should be set aside. His Honour ordered that the matter be remitted to the present respondent (``the Commissioner'') for reconsideration with the direction that goods to the value of $1,170,193 were trading stock of the taxpayer on hand as at 30 June 1985, but that goods valued at $219,324 were not on hand at that date. Upon the present appeal, no question arises as to the goods valued at $219,324.
Section 6(1) of the Income Tax Assessment Act 1936 (``the Act'') provides that in that statute, unless the contrary intention appears:
```Trading stock' includes anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange, and also includes live stock.''
The terms of this definition may be traced to that in sec. 4 of the Income Tax Assessment Act 1922 (``the 1922 Act''). This provided that, unless the contrary intention appeared, ``trading stock'' meant ``anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange''. The definition introduced in 1936 used the term ``includes'' rather than ``means''. It also specifically included ``live stock''. This may have been a reaction to decisions upon the definition in the 1922 Act which held that at least in some circumstances livestock were not within the reach of that definition:
Robinson v. F.C. of T. (1927) 39 C.L.R. 297;
Austin Pastoral Co. of Bringagee Ltd. v. F.C. of T. (1928) 41 C.L.R. 75.
Whilst the definition in the 1922 Act was expressed as a complete description, the current definition is expansive in the sense that it operates ``cumulatively upon the ordinary meaning'' of trading stock.
``The ordinary meaning of the term `trading stock' upon which [the present definition] builds is that which is attributed to it by legal and commercial people for accounting and other purposes.''
F.C. of T. v. Suttons Motors (Chullora) Wholesale Pty. Ltd. 85 ATC 4398 at p. 4400; (1985) 157 C.L.R. 277 at p. 281.
Section 28 of the Act, together with the definition in sec. 6(1), is the central provision involved in the present litigation. The section provides:
``28(1) Where a taxpayer carries on any business, the value, ascertained under this subdivision, of all trading stock on hand at the beginning of the year of income, and of all trading stock on hand at the end of that year shall be taken into account in ascertaining whether or not the taxpayer has a taxable income.
28(2) Where the value of all trading stock on hand at the end of the year of income exceeds the value of all trading stock on hand at the beginning of that year, the assessable income of the taxpayer shall include the amount of the excess.
28(3) Where the value of all trading stock on hand at the beginning of the year of income exceeds the value of all trading stock on hand at the end of that year, the amount of the excess shall be an allowable deduction.''
The section is thus concerned with fixing the difference between two values, one ascertained at the beginning of the year of income, and the other at the end of the year of income. The section uses the expression ``all trading stock on hand'' to identify that between which the difference is taken at these two points of time. The amount of the difference is included in the assessable income of the taxpayer, or, as the case may be, is allowable as a deduction.
The present appeal is concerned with the question whether certain goods which had been manufactured abroad and which, at the end of the year of income ending 30 June 1985, had been ``acquired or purchased [by the taxpayer] for purposes of... sale...'' within the meaning of the definition in sec. 6(1), nevertheless were not to be taken into account under sec. 28 of the Act because on 30 June 1985 they were still on the water. The taxpayer submitted that, as goods ``in transit'' they were not ``trading stock on hand at the end of [the] year [of income]''. Accordingly, attention was focused in submissions upon the expression ``trading stock on hand'' as it appears in sec. 28. In short, the parties agree that the goods are ``trading stock'' as defined in sec. 6(1) and the issue is whether they answer the description in sec. 28 of trading stock ``on hand'' at the end of the 1985 year of income.
It may be noted that sec. 16 of the 1922 Act stated that the assessable income of a taxpayer shall include profits derived from any trade or
ATC 4177business and converted into stock-in-trade, provided that, for the purpose of computing such profits, trading stock ``not disposed of'' at the beginning and end of the period in which the income was derived should be taken into account, with exceptions not here relevant. If the present case had fallen for decision under sec. 16 of the 1922 Act, it would, we think, have been clear enough that the goods with which this appeal is concerned were trading stock which had not been disposed of at the end of the year of income in question. The question is whether any different result follows from the manner of expression of the concepts underlying the present sec. 28. We do not consider that changing the expression from trading stock ``not disposed of'' to trading stock ``on hand'' was intended to alter the law. It was a conversion to the language of commerce.
The relevant facts were found by the Tribunal. The taxpayer is a company which, in the relevant year of income, carried on business as a wholesale dealer in a variety of frozen food goods. In the ordinary course of its business the taxpayer purchased such goods for general resale and received them, upon delivery from its suppliers, into storage under its control. In the case of imported goods, on their arrival in Australia, the taxpayer arranged for them to be ``decontainerised'' and to be tested for conformity to standards. Only when these steps had been taken did the taxpayer sell such goods to other wholesalers and to retailers within Australia, effecting or directing the delivery of the goods under its immediate control out of the taxpayer's general store. It was no part of the business of the taxpayer to deal in imported goods whilst they were in transit to Australia. In one instance, as an alternative to having one container delivered to its own store, the taxpayer had the container delivered direct to the store of a purchaser.
At midnight on 30 June 1985, shipping containers filled with a variety of frozen food products from countries including Taiwan, Malaysia, Uruguay, Japan, Belgium and New Zealand were en route by sea to Australia. Each delivery was being made pursuant to a contract entered into between a supplier as seller and the taxpayer as buyer. In each case the price had been paid. The goods with which this appeal is concerned were the subject of three cost, insurance and freight (CIF) contracts with a value of $102,943, and twenty-one cost and freight (C & F) contracts with a value of $1,067,250. In respect of all of these contracts, with the total value of $1,170,193, the bills of lading had been delivered to the taxpayer before 30 June 1985. The physical delivery of the goods into Australia only occurred after 30 June 1985.
In its return of income for the year ended 30 June 1985, the taxpayer claimed to have ``stock in transit'' which it had brought to account as part of ``inventories'' in its balance sheet for the year. In an attached note, the item for ``inventories'' was dissected between ``stock in warehouse'' and ``stock in transit''. Neither the stock nor the cost thereof was brought to account in the taxpayer's trading account for the year of income, but the income tax return stated that ``stock in transit is raised as an asset in the balance sheet with a corresponding creditor raised as a liability''. The accounts suggest that the opening figure at 1 July in the income year also excluded ``stock in transit''. The income tax return claimed that the price of the stock in transit was an outgoing incurred in respect of goods in transit and was deductible under sec. 51(1) of the Act. The Commissioner allowed the deduction claimed but brought the stock to account as stock on hand at the end of the year of income.
The conclusion of the Tribunal, with which Davies J. disagreed, appears from the following passage in the Tribunal's reasons:
``It may be that, by reason of the `passing of property' the frozen products in question became `trading stock' of the applicant at 30 June 1985. But, even if that were so, it was not trading stock `on hand'. On 30 June 1985, the products in question could not have been sold in the ordinary course of business.''
On the hearing of the present appeal there was no dispute but that as at 30 June 1985, in respect of the goods the subject of the CIF and C & F contracts, the risk had passed to the taxpayer, the property in the goods had vested in the taxpayer, and there had been a constructive, although not actual, delivery of possession. The operation of the relevant principles of the law of sale of goods upon contracts of the description involved in this case is set out in the following passage from Professor Sutton's work Sales and Consumer
ATC 4178Law in Australia and New Zealand, 3rd ed., 1983, at pp. 555-556, from which we have omitted the citation of authorities in the footnotes:
``The essential feature of a c.i.f. contract is that delivery is satisfied by delivery of documents representing the goods and not by actual physical delivery of the goods. The buyer undertakes to pay for and accept the documents as representing the goods rather than the goods themselves. Hence, his sole right is to call for the documents and the seller's sole duty is to furnish them. The buyer cannot refuse the documents and demand the goods, nor can the seller withhold the documents and tender the goods they represent. The property in the goods usually passes by delivery of the documents against which payment is made, but exceptionally, the parties may intend property to pass on shipment. On the other hand, the risk passes to the buyer as soon as the goods cross the ship's rail at the port of shipment. On presentation of the documents complete and regular, the buyer is bound to pay the price even though the goods or part of them are to the seller's knowledge, already lost. The buyer cannot recover the price he may have already paid on the ground of total failure of consideration, as the property in the goods (if existing) has passed to him, or he has acquired the documents and the rights available thereunder if the goods are lost.
When the goods are shipped c.i.f. there is a contract of affreightment under which the master of the vessel is bound to deliver the goods to whoever produces the documents at the end of the voyage. While the goods are in transit the first holder of the documents can sell the goods to a buyer by delivering the documents in exchange for payment of the price, and there may be a chain of such sales. None of the sellers knows for certain whether his buyer will take delivery or will re-sell the goods by delivering the documents to another buyer. None of these sales is advised to the master of the vessel. He has no concern with them and likewise once a seller has delivered the documents and received the price he has no concern with further sales or with the ultimate delivery of the goods. He does not deliver the goods either actually or fictionally to his buyer on their arrival. The only delivery of the goods is by the master to the ultimate buyer who presents the documents to him.''
If these principles are applied to the facts of the present case, then, in our view, plainly, at the end of the relevant year of income, the goods the subject of the CIF and C & F contracts had been acquired or purchased by the taxpayer for the purpose of sale within the meaning of the definition of ``trading stock'' in the Act. The goods had been purchased or acquired for the relevant purpose, although as at the end of the relevant year of income there had been a constructive rather than actual delivery of possession to the taxpayer.
Counsel for the taxpayer submitted that, consistently with the conclusion reached by the Tribunal, the goods were not trading stock ``on hand''. He submitted that the goods could not be ``on hand'' within the meaning of sec. 28 in the absence of physical delivery of the goods into the possession of the taxpayer before the end of the relevant year of income. Constructive delivery would not suffice. As an alternative proposition, counsel for the taxpayer submitted that the goods could not have been ``on hand'' because they were not ``physically available'' to the taxpayer ``to be sold in the ordinary course of its business''; counsel relied on the finding by the Tribunal that it was no part of the business of the taxpayer to deal in goods which were in transit to Australia and before physical delivery of the goods into the control of the taxpayer.
For support for these propositions, counsel for the taxpayer referred to various decisions in other jurisdictions construing the income tax legislation of other countries.
Particular reliance was placed upon
Benjamin Smith & Son v. Commrs of I.R. (1928) 139 L.T. 97 (H.L.), 6 Annotated Tax Cases 412 (C.A.), 5 Annotated Tax Cases 643 (Rowlatt J.). But in truth, what was said in the judgments in that litigation has to be understood in the context of the particular British legislation involved. The Finance Act 1921 (11 & 12 Geo. V., c. 32) (U.K.) provided in Rule 1 of Part II of the Second Schedule:
``If any person who is at the end of the final accounting period the owner of any trade or business proves that he has sustained a loss on the sale at any time during the period
ATC 4179between the 1st day of September 1921 and the 31st day of August 1923 both inclusive... of the whole of the trading stock in hand on the 31st day of August 1921 the amount of the loss shall be allowed as a deduction in computing the excess profits of the final accounting period or as an addition to any deficiency for that period as the case may be.''
The taxpayers were grain importers, grain merchants and millers who purchased large quantities of grain which had to be shipped from abroad under CIF contracts. They claimed to be entitled to relief under this provision in respect of grain which had been appropriated to them or had been shipped to their order prior to and including 31 August 1921, although the bills of lading were not taken up by them until after that date.
The taxpayer was unsuccessful at first instance, before the Court of Appeal and before the House of Lords. It was held that the ``trading stock in hand'' of the taxpayer within the meaning of Rule 1, did not include all existing grain which the taxpayer had contracted to buy prior to and including 31 August 1921, and all grain which had been appropriated to them or had been shipped to their order on or before that date. Rather, such grain was goods to be delivered under contracts for future delivery, something which was expressly distinguished from ``trading stock in hand'', and which formed the subject of separate and additional relief under another provision of the legislation. In the House of Lords, Lord Sumner put the distinction as follows (139 L.T. 97 at p. 100):
``Par. 1 provides that a taxpayer may, for the purposes of Part I, be entitled to a deduction on proof, first of all, that `the whole of the trading stock in hand' at the fixed date exceeded so much. Then par. 4 added to this that if he proves that within a specified time after that fixed date `trading stock has been delivered to him for the purposes of the trade under written contracts' binding on him at the fixed date, which are afterwards referred to as `forward stock', they also may be made the subject of further relief, but by a proviso this only applies where the quantity of `forward stock' does not exceed the yearly average of similar stock `delivered under contracts for future delivery' during a prior period. The goods now in question were precisely goods to be `delivered under contracts for future delivery', and in common commercial language they would be called `forward' goods, in accordance with the language of the statute. They are expressly distinguished from `trading stock in hand', and form the subject of separate and additional relief.''
In the judgments at first instance and in the Court of Appeal in Benjamin Smith & Son v. Commrs of I.R. (supra) there was discussion of the Irish decision
J.W. Green & Co. Ltd. v. Revenue Commissioners (1927) I.R. 240. However, the Irish courts in that litigation were construing the same provisions of the British legislation as were the courts in Benjamin Smith & Son v. Commrs of I.R., and what is said in the judgments in the Irish case as to the expression ``trading stock in hand'' has to be read with this in mind.
The legislation considered in these cases stands in stark contrast to sec. 28 of the Australian Act. Section 28 draws a distinction between the value of trading stock ``on hand'' at the beginning and at the end of the year of income. This legislation, unlike the British legislation, does not identify a further class or category of trading stock, which before the end of the year of income in question has been acquired or purchased by the taxpayer for the purpose of sale, and has not been disposed of before the end of the year of income, but which, nevertheless, is to be regarded as not ``on hand'' at the end of the year of income. In our view, the submissions for the taxpayer, which seek to identify such a further class or category of trading stock, are in conflict with the true construction of sec. 28. The goods with which this case is concerned were ``trading stock on hand'' for the purposes of sec. 28, notwithstanding that they had not been physically delivered into the taxpayer's store.
Reference was made in argument to a passage in the judgment of Bowen C.J. in F.C. of T. v. Suttons Motors (Chullora) Wholesale Pty. Ltd. 83 ATC 4304; (1983) 68 F.L.R. 181, aff'd 85 ATC 4398; (1985) 157 C.L.R. 277. In that case, the taxpayer was a wholesaler of new motor vehicles. It had the possession and control of the vehicles, the right to acquire title to them, and had assumed the risk with respect to them. Nevertheless, it was submitted for the
ATC 4180Commissioner that the term ``acquired'' where it appears in the definition of ``trading stock'' in sec. 6(1) of the Act means the acquisition of title, or the legal right to obtain title. In his judgment, Bowen C.J. (at p. 185) held that the term ``acquired'' had a wide range of possible applications and was not to be limited to situations where what had been acquired was the legal title or the right thereto. As a commercial and practical matter, the taxpayer was committed to the ultimate sale of the vehicles to consumers, and it would be artificial and strained to suggest that it had not acquired the vehicles. Thus, the Commissioner's submission as to the limited scope of the term ``acquired'' was rejected. Toohey and Jenkinson JJ. delivered judgments to the same effect.
In the course of rejecting the Commissioner's submission, Bowen C.J. (at p. 184) referred to the reliance by the Commissioner upon
Farnsworth v. F.C. of T. (1949) 78 C.L.R. 504, and to the suggestion in that case by Rich J. (at p. 515) that ownership might characterise stock in trade. Bowen C.J. expressed the view that the basic factor underlying the decision in Farnsworth's case appeared from what was said by Dixon J. (78 C.L.R. at p. 518), the basis of his decision being that the produce in question in that case had ceased to be ``on hand'' when it was delivered to the packing company. Bowen C.J. continued (at pp. 184-185):
``Indeed, possession of goods seems to be necessary before trading stock can be regarded as `on hand'. Where goods have not been delivered they generally cannot be treated as trading stock on hand despite the fact that property in the goods may have passed to the taxpayer: (
J.H. Young & Co. v. Inland Revenue Commissioners (1925) 12 Tax Cas. 827; J.W. Green & Co. v. The Revenue Commissioners  I.R. 240).''
What was there said has to be read in context. In the Suttons Motors case (supra), the Commissioner had submitted that goods could not be relevantly ``acquired'' without the legal title or the right thereto; Bowen C.J. was pointing out that not only was the acquisition of title not essential in all cases, but also that the circumstance that property had passed and title had been acquired would, of itself, generally not be sufficient to render goods as trading stock on hand. Bowen C.J. was not saying that if goods were, as in the present case, indubitably trading stock within the meaning of the definition in sec. 6(1) of the Act, nevertheless they were not ``on hand'' for the purposes of sec. 28 if there had not been physical delivery of the goods.
We conclude that the authorities upon which the taxpayer placed primary reliance do not support the propositions propounded by the taxpayer, either as to the necessity for physical delivery or as to ``physical availability'', for sale in the ordinary course of the business of the taxpayer.
That conclusion might have required qualification if evidence had been led which had cast light on the ordinary meaning of the expression ``trading stock on hand'' attributed to it by commercial people and accountants. But no such evidence was led by either party, whether from witnesses or documents.
Davies J. said in his reasons for judgment [89 ATC at pp. 5140-5141], after referring to
Carden's case (1938) 63 C.L.R. 108 at pp. 155-156, and
F.C. of T. v. St. Hubert's Island Pty. Ltd. (in liq.) 78 ATC 4104 at pp. 4107-4108, 4112-4113; (1978) 138 C.L.R. 210 at pp. 218-219, 226-228, 244-245:
``In this light, the taxpayer's method of accounting for the subject transactions during the year of income was erroneous. The transactions were not just balance sheet items reflecting assets and liabilities. In respect of the subject goods, more than $1m had been paid or incurred and the expenditure was in respect of trading stock. The transaction was a revenue transaction. It was inconsistent with the ordinary practices of the commercial and business world, with ordinary accounting principles and practice and with taxation principles and practice to treat the transactions as balance sheet transactions only not to be reflected in the profit and loss account until the goods had actually been received into the taxpayer's warehouse. Entries reflecting the transactions should have been made in trading accounts and reflected in the taxpayer's profit and loss account for the year.
How could the cost of the goods have been entered just as a liability in the balance sheet? The expenditure was not expenditure
ATC 4181on fixed capital. The taxpayer had purchased the subject goods for use as stock. Having accepted the bills of lading it was the owner of the goods, they were at its risk, it was entitled to possession of them and it had control, dispositive power over them. Why then were not the goods recorded as stock and why was not the cost thereof included with other amounts in the item `Purchases' in the trading account?
Of course, if the correct accounting entries had been made, it is likely that the taxpayer's claim in this case would not have been pursued.
But the words `on hand' or `in-hand' have long been terms used to refer to the stock held by a trader at a particular time, whether currently or at a time of stocktaking or at a balancing date. The Shorter Oxford English Dictionary gives this meaning of the word `stock':
- `VI.10. The aggregate of goods, or of some specified kind of goods which a trader has no hand as a provision for the possible future requirements of customers 1696.'
The term `on hand' was in fact used in an explanatory handbook showing differences between the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1922 which was published in August 1936 under the authority of the Commonwealth Treasurer and was used as if the term added nothing to the new provisions. Neither The Law of Income Tax by Radcliffe, McGraw and Hughes, published in 1938, nor Dr Hannan's monograph on the Principles of Income Taxation, published in 1946, suggested that the words `on hand' imported any element other than that the stock referred to was stock held by the taxpayer on the relevant date.
The words `trading stock on hand' in sec. 28 thus refer to the trading stock held by the taxpayer at the specified time. Because the trading stock provisions are based upon well known concepts of trade and accountancy, those concepts of what stock a trader holds and thus what should be brought to account in a calculation of the profits or income of the year provide a guide as to the stock `on hand' at the relevant date. In the present case, that stock included the goods in respect of which bills of lading were held.''
We were referred in argument by counsel for each party to various textbooks and other published works on accounting principles including Accountants' Handbook, 6th ed., edited by Seidler and Carmichael; Carter's Advanced Accountants, 7th ed., by Douglas Garbutt; Accounting, 5th ed., by Walter & Robert Meigs (all three being American publications); Australian Accounting, 3rd ed., by Colditz & Gibbins at p. 363; Issues in Financial Accounting, 3rd ed., by Henderson & Peirson at p. 302 (the last two publications being with respect to Australian accounting standards); Accounting Fundamentals by Yorston Smyth & Brown, 8th ed., 1986 (also an Australian publication but purporting to be an exposition of the fundamental principles and procedures of accounting methods suitable for students preparing for examinations).
Most of these publications support the view that goods in transit to which title has passed to the buyer (e.g. where the terms of shipment are free on board, at shipping point, or, as here, cost, insurance and freight contracts, and cost and freight contracts where the bills of lading had been delivered to the buyer) belong in the inventory of the buyer, not the seller, or, as it is sometimes expressed, that all goods to which the purchaser has title should be included in his inventory regardless of their location.
The extent to which this Court, when deciding questions of law, may take publications of this kind into account when they are not in evidence is open to question. The guiding principle is to be found in the speech of Lord Sumner in
Commonwealth Shipping Representative v. Peninsular & Oriental Branch Service (1923) A.C. 191, where his Lordship said, at p. 212:
``I do not, however, think that this is a true case of taking judicial notice, for that involves that, at the stage when evidence of material facts can be properly received, certain facts may be deemed to be established, although not proved by sworn testimony, or by the production, out of the proper custody, of documents, which speak for themselves. Judicial notice refers to facts, which a judge can be called upon to receive and act upon, either from his general
ATC 4182knowledge of them, or from inquiries to be made by himself for his own information from sources to which it is proper for him to refer.''
Cavanett v. Chambers (1968) S.A.S.R. 97 and Cross on Evidence, 3rd Australian ed., 1986, at para. 2.6 and 2.17.
In the absence of appropriate evidence before the Tribunal, in our opinion the correct approach for this Court to take is to rely on our earlier holding, when reviewing the authorities, that the goods with which this case is concerned were ``trading stock on hand'' for the purposes of sec. 28, notwithstanding that they had not been physically delivered into the appellant's store. This finding is consistent with the body of accounting publications to which we were referred assuming, though we need not decide the point, that it is legitimate to bring publications of this kind within the legitimate scope of judicial notice.
We would dismiss the appeal with costs.