CROMMELIN v DFC of TJudges:
This is an appeal from a decision of the Administrative Appeals Tribunal (``the Tribunal'') given on 4 April 1997 [reported at Case 21/97,
97 ATC 266]. The appeal is brought pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) and is confined to questions of law. By its decision the Tribunal affirmed an objection decision made by the respondent (``the Deputy Comm- issioner'') on 30 June 1994. That decision disallowed an objection made by the applicant (``Mr Crommelin'') against an amended assessment issued by the Deputy Commissioner under the Income Tax Assessment Act 1936 (Cth) (``the Act'') on 11 June 1992 for the year of income ended 30 June 1989. By that amended assessment the Deputy Commissioner had included in Mr Crommelin's income for that year an amount of $154,196 as having been received by the applicant either as income pursuant to s 25(1) of the Act or, alternatively, as a net capital gain assessable under Pt IIIA of the Act.
The amount in question allegedly formed part of a total sum paid to Mr Crommelin upon his retirement on 30 September 1988 from a firm of solicitors in which he had been a partner. At the time of his retirement, the firm consisted of four partners. There was no written partnership agreement but each partner had equal shares in the partnership and also in two companies associated with the firm. These companies are
ATC 4792of no significance in the case. The firm operated in a number of areas but did not, as part of its practice, offer advice in taxation matters. It operated very profitably but, in 1988, there was some tension between the applicant and one of the other partners, Mr Taylor, which, coupled with other matters to which reference need not be made, caused the applicant to wish to retire from the partnership. It was accepted by all the partners that upon his retirement which, by agreement, was to be effective on 30 September 1988, he was entitled to be paid for his one quarter interest in the assets of the firm. As the Tribunal found, he was anxious to retire and, consequently, exerted some pressure on the other partners to reach agreement with him as to the financial details of his retirement. In the circumstances no elaborate written agreement was entered into. The retirement was formalised by means of a letter signed by all the partners and dated 4 November 1988. The relevant part of the letter, for present purposes, related to the payment to him of moneys upon his retirement. It provided as follows:-
``The figure of $281,195.00 is in payment for your share of net tangible assets and it is agreed that the payment of goodwill shall be $175,000.00.
The terms of payment are as follows:-
- (a) 30% of the total figure by the 31st October 1988. (The figure of $136,858.50 has now been paid.)
- (b) The balance of the net tangible assets (ie. all except goodwill) to be paid by the 30th November 1988.
- (c) The figure for goodwill to be paid when the loan becomes available but in no case shall it be later than the 31st December 1988.''
It was the Deputy Commissioner's contention that the figure of $281,195 included within it the amount of $154,196 as a payment for the applicant's one quarter share in the work in progress of the firm as at 30 September 1988 and, as such, was part of Mr Crommelin's assessable income for the year ending 30 June 1989.
The Tribunal found that this amount had not been received by the applicant as income pursuant to s 25(1) of the Act but was assessable as a capital gain. From that decision Mr Crommelin appealed asserting that the amount was not taxable as a capital gain. The Deputy Commissioner has sought to uphold the finding of the Tribunal but has also, by notice of contention, asserted, in these proceedings, that the amount formed part of the assessable income of the applicant.
In view of the fact that, should the amount be held to be income according to ordinary concepts, then the question of its assessability as a capital gain cannot arise, the parties to the appeal have agreed that the question whether the Tribunal has erred in law in failing to find that the payment should be characterised as income, should be decided first. I turn, therefore, to consider the way in which the Tribunal approached this question.
The case in the Tribunal
The Tribunal noted that after the applicant advised his partners of his intention to retire there were various discussions among them. These discussions were the subject of disagreement in the evidence. Basically, the applicant adopted the stance that he made no agreement with his partners that the figure of $154,196 was to be attributed to his share of work in progress at the time of retirement, although he accepted that he was to be paid some appropriate amount in this regard, as part of his one quarter interest in the firm. He wanted a figure to be arrived at quickly and, providing it fell within an accepted range, he would accept it. The combined figure for goodwill and net tangible assets, namely $456,195 fell within this range and was acceptable. He received it as an undifferentiated capital sum, no component of which, other than for goodwill, was identified. Accordingly, no tax was attracted under s 25(1). It was the contention of his partners that the figure for net tangible assets included the figure of $154,196 as a component for work in progress in respect of which the applicant, as retiring partner, should bear any appropriate taxation liability; it was not to be borne later by the continuing partners. Indeed, after the applicant had signed the letter of 4 November 1988 a postscript was added and initialled by the continuing partners. It read ``it is acknowledged that you will be responsible for income tax on that part of the payment which is in respect of work in progress, debtors and any other tangible items''. Although Mr Crommelin did not initial this addendum, he was aware of it during the period that he received the instalments of payment. Under the terms of the agreement he remained
ATC 4793working as a consultant with the firm for some time after his retirement as a partner.
In determining whether the amount of $154,196 formed part of the applicant's assessable income, the Tribunal first considered the authorities bearing upon the taxability of work in progress. These were
Henderson v FC of T 70 ATC 4016; (1970) 119 CLR 612;
Jamieson v Commr of Inland Revenue 74 ATC 6008; and
Stapleton v FC of T 89 ATC 4818; (1989) 88 ALR 606. From these cases it accepted that the term ``work in progress'' meant work which was incomplete and for which clients of the firm were not then required to pay. It stated that [reported at Case 41/96,
96 ATC 417 at 420]:-
``15. In essence, those cases also decide that, where an amount has been paid to the partner retiring from a partnership and that amount includes an identifiable, or discrete, amount for the work in progress of the partnership at the date of his or her retirement, it is to be treated as income. If it does not include such an identifiable or discrete amount, then it is to be regarded as capital.''
In so doing it adopted a formulation similar to that expounded by the Commissioner in Taxation Ruling IT 2551, which formulation was relied upon by the applicant and to which I shall make reference later.
The Tribunal then considered the evidence in the case, which had been extensive and which was both oral and documentary, ``in order to determine whether the sums paid to the applicant as a result of his retirement from the Firm included a discrete amount for work in progress at the date of his retirement i.e. 30 September 1988''. I shall not set out this evidence but make reference merely to the salient findings.
The Tribunal was satisfied that by mid-1988 the firm used a computerised system as a management tool. This produced a printout each month for use at the partners' meetings. The printout showed, inter alia, the time costing of work in progress, being work that had been done but had not reached the stage of being billed. Every file in the firm was listed in each printout, which was an extensive document, as was the monthly spreadsheet that was prepared from it. There was some conflict as to the use to which the printout and associated worksheet was put. The Tribunal, however, accepted ``that the computerised system did produce a figure that was a 'working guesstimate' of the Firm's work in progress''. The Tribunal found that [at p 422]:-
``... [t]he figure shown on the computerised system as the hourly rate costing for any particular file might not be precisely reflected in the bill rendered to the client as it might be adjusted if the billing was to be based on value and not upon hours. Taken overall, however, the figure shown on the Firm's computerised system for work in progress was a fair indication of the value of that work for management purposes.''
The Tribunal found that negotiations in relation to the applicant's retirement were oral and that there was definite agreement as to the figure of $175,000 to be paid for him as his share of the firm's goodwill, this having been arrived at after a revaluation of the amounts recorded for goodwill in the firm's accounts. The Tribunal was also satisfied that the applicant required that he be paid for his quarter interest in all the firm's assets, including work in progress, and that this was accepted by the continuing partners.
The Tribunal also found that as at 30 September 1988 the figure for work in progress shown on the printout from the firm's computer system was $616,784. It also found that Mr Crommelin expressed a view ``that the value of the work in progress could be ascertained on the basis of the figures in the computerised system's printout''. It was also satisfied that he told two of the continuing partners, Mr Shand and Mr de Silva, that if they were not prepared to accept the figures in the printout then each of the firm's files would have to be assessed by a cost assessor, which would have been a costly and time-consuming procedure. This finding was made on the basis of the evidence of the two continuing partners which was preferred to evidence to the contrary given by the applicant.
In addition to the printout from the firm's computerised system, there was another document which entered into the Tribunal's deliberations. This was a document referred to in the evidence and in the Tribunal's reasons as the ``three page worksheet''. This document was prepared by the firm's outside accountants for the purpose of the valuation of the applicant's share in the firm. It is apparent that it was the subject of conflicting evidence. It was a fairly elaborate document. In its heading it
ATC 4794was described as ``net tangible assets as at 30 September 1988''. Mr Crommelin deposed that the document was not furnished to him at the time of his negotiations with Mr Shand and Mr de Silva and that, indeed, he had not seen it until October 1994. Mr Taylor was also of the view that it was not available during the negotiations with Mr Crommelin in relation to his retirement. Mr Moye, the author of the document testified that discussions in relation to the document with the partners would have only occurred, he believed, at the time of the preparation of the 1989 income tax returns, probably in August 1989. Such evidence was given on the basis of recollection at a distance of more than eight years. As the Tribunal remarked, it was not surprising that recollections should differ in such circumstances. It appears, however, that, only late in the case, a facsimile header was discovered and produced in evidence which indicated that the document had in fact been sent to the firm on 21 October 1988. It had, therefore, been available for discussion at the time when the amount of payment to be made to the applicant was being decided. It appears that the benefit of this information was not available during the testimony of the partners. Accordingly it remains unknown whether their recollection might have been assisted by this knowledge. However, in the state of the evidence, the Tribunal specifically made ``no finding whether the applicant or the continuing partners had any regard to... [the] worksheet for there is no evidence that they recalled having seen it until much later''. Nevertheless, the Tribunal made some findings in relation to the worksheet and the figure accepted therein for the value of work in progress in the firm as at 30 September 1988. The worksheet specifically referred to the value of work in progress as being $616,784. The Tribunal was satisfied that this accorded with the figure shown on the firm's computerised system's printout and further held that the figure had been taken from that printout for the purpose of inclusion by the accountant in the worksheet forwarded on 21 October 1988.
The Tribunal, irrespective of its inability to find that all the partners had considered the worksheet in relation to determining the amount to pay Mr Crommelin, was, nevertheless, satisfied that the continuing partners had reached an agreement amongst themselves as to the value of the work in progress. The value that they assigned was the figure of $616,784 taken from the computerised system's printout. They all agreed that that figure was ``an accurate estimate of the work in progress''. Reference to the evidence in the case indicates quite clearly that there was unanimity amongst those partners that the figure properly represented profit from the work as all relevant costs had been incurred.
The Tribunal then posed for itself the question: ``Was there ultimately an agreement between the applicant and the continuing partners that this was the value of the work in progress?'' It seems quite clear that, in relation to this question, the Tribunal was asking itself whether it was satisfied that an express agreement had been so reached. It recorded the fact that the applicant had said that there was not an agreement and that the other partners were not able to assert that the figure had been discussed with the applicant and agreed to. There was no finding, however, that the remaining partners agreed with the applicant that consensus had not been reached that the printout figure should be accepted as the value of work in progress.
The Tribunal then considered a submission made on behalf of the Deputy Commissioner based upon the figures contained in the worksheet and the figure provided for ``net tangible assets'' in the letter of 4 November 1988. It appears that the submission was made in the context that the oral testimony, in itself, did not permit of a finding that all parties had agreed that the figure of $616,784 should be accepted as the value for work in progress as at 30 September 1988. It was put that a consideration of the worksheet in conjunction with the letter of 4 November 1988 indicated that one quarter of the computer printout figure had been included in the figure of $281,195 stipulated in that letter as being Mr Crommelin's ``share of net tangible assets''. The Tribunal's findings in this regard assumed particular significance in the argument on the appeal. It is appropriate that they be set out in full. They read as follows [at p 424]:-
``41. We have taken account also of the precise figures contained in the worksheet. That worksheet was certainly available to the Firm at the time of the negotiations for we have already heard that it was sent to them. Mr Logan submitted that the letter of
ATC 47954 November, 1988 signed by the applicant and the continuing partners and recording the oral agreement was based on the figures in the worksheet and that its language mirrored it. As the worksheet showed work in progress as valued at $616,784, it followed that the partners had agreed that the applicant would be paid one quarter of that figure for his share of that work in progress.
42. The language of the letter of 4 November, 1988 is consistent with that used in the worksheet in so far as it refers to `net tangible assets'. If the letter were mirroring the worksheet, it could also be expected that the figures in that letter would also mirror those in the worksheet. We find that they do not in an important respect. The figures given in the two documents for goodwill are consistent. With respect to the net tangible assets they do not. After the value of the residential unit and the value of the goodwill are deducted from the total value of the net tangible assets ($1,955,629), the value of the net tangible assets is $1,137,462. A quarter of that figure amounts to $284,365. The figure shown in the letter for the applicant's share of net tangible assets is $281,195.
43. It follows from this analysis, that the most we can find is that the worksheet may have provided a guide in the terminology used in the letter. We cannot find that the foundation of the figures recorded in that letter lay in the worksheet. This accords also with the memories of [the remaining partners] who had no recollection of seeing the worksheet at the time of the negotiations.''
The Tribunal continued by saying that it took that evidence into account with the evidence of the applicant who had denied any agreement as to the value of the work in progress and that of one of the remaining partners who had said that ``he did not think that there was any discussion regarding the full amount of all the components other than goodwill... [and] could not say that he discussed the figure of $616,784 with the applicant''. Having done so the Tribunal made the finding that ``there was no agreement either that the specific amount of $154,196 was to be paid to the applicant or that the applicant was to be paid a quarter of the work in progress valued at $616,784''.
It also found that the postscript which had been placed upon the letter of 4 November 1988 after the applicant had signed it did not ``assist in determining whether or not an agreement was reached as to the discrete amount of the work in progress to be paid to the applicant''.
I should state that, in my view, these findings clearly relate to whether or not there was an agreement between the applicant and the remaining partners. They do not amount to a finding that the remaining partners did not themselves fix upon a figure of one quarter of the computer printout amount as being the appropriate figure to be paid to the applicant for his share in the value of work in progress. Indeed, this was made quite plain in a later finding in the Tribunal's reasons which was expressed as follows [at pp 4426-4427]:-
``60. In this case, an amount was included for work in progress even though we have found that it was not quantified. We have made that finding on the basis that there was never any suggestion from any of the witnesses, particularly the partners, that no amount was allowed for work in progress. Indeed, as we have found, the applicant wanted a quarter share of all of the partnership assets including the work in progress. That was so even though he stated that he had been prepared to accept as payment any figure offered provided it fell within a fairly broad range. The other partners, we have found, did formulate amongst themselves a figure for the work in progress.''
On the basis of these findings the Tribunal stated that it had concluded ``that the sum of $154,196 is not assessable income within the meaning of sub-section 25(1) of the Act''.
Having made this finding the Tribunal then proceeded to consider whether the figure should be regarded ``as a net capital gain accruing to the applicant''. In the ultimate the Tribunal found that it was so and was, accordingly, assessable to tax. Having regard to my view as to the outcome of this appeal, I do not find it necessary to consider this aspect of the Tribunal's reasons.
I turn then to the consideration of the appeal in relation to the Tribunal's finding that the amount in question was not assessable as income under s 25(1) of the Act.
The case on appeal
As I have already indicated, the Deputy Commissioner attacked this finding of the Tribunal by way of notice of contention. Senior counsel for the respondent put, in the forefront of his submissions, the contention that the Tribunal had erred in law in failing to find that the amount had been received by the applicant as income according to ordinary concepts, a finding to this effect necessarily meaning that no capital gains tax issue could arise. In these circumstances, senior counsel for the applicant addressed the s 25(1) question at the outset of his submissions. In doing so he relied upon the view of the relevant law set forth in Taxation Ruling IT 2551 (``IT 2551'') issued by the Commissioner for Taxation on 10 August 1989. IT 2551 related, inter alia, to ``amounts paid to retiring partners on account of work in progress''.
IT 2551 referred to the judgments in Henderson, Jamieson and
FC of T v The Myer Emporium Ltd 87 ATC 4363; (1986-1987) 163 CLR 199. After indicating that the Taxation Office did not seek to tax the same amount twice, IT 2551 continued with the following paragraphs:-
``8. The income tax implications attaching to payments made to an outgoing partner or to the trustee of the estate of a deceased partner in respect of work in progress at the date of dissolution or variation of a partnership will depend upon: (i) whether the outgoing partner or estate of a deceased partner is entitled by virtue of the express and implied terms of the partnership agreement to a share of the anticipated profits from work in progress and, (ii) whether the outgoing or deceased partner's share of such anticipated profits has been valued. The true nature of each payment must, therefore, be determined in each case.
9. As a general rule, if separate consideration attaches to the work in progress such that the amount payable to the retiring partner or deceased estate reflects the future profits that the retiring or deceased partner would have expected to have received in respect of the work in progress had he or she remained a partner in the partnership, e.g. as in the Jamieson case, the amount of consideration should be treated as assessable income of the outgoing partner or the deceased estate in the year in which the payment is received. The nature of the payment is that it is a lump sum received in exchange for the future income that the outgoing or deceased partner would have received in respect of past income- earning activities if that person had remained a partner (cf. F.C. of T. v. The Myer Emporium Ltd. 87 ATC 4363 at p. 4371).
12. On the other hand, where an amount paid to an outgoing partner or the trustee of the estate of a deceased partner in respect of the outgoing or deceased partner's interest in the partnership at the date of dissolution or variation includes an element for work in progress without any detailed calculation of the profit content in the work in progress, e.g. as in the Taxation Board of Review case referred to in para. 6 [Case B60, 70 ATC 284], no amount should be included in the assessable income of the outgoing partner. The amount paid for work in progress in situations of this kind is part of the total consideration paid for the disposal of the partnership interest at the date of dissolution or variation and will be regarded as being of a capital nature.''
On behalf of the applicant reliance was placed upon these parts of IT 2551. In particular it was submitted that the present case was ``a paragraph 12 case''.
The applicant submitted that the Tribunal had correctly taken the view ``that it had to be established that there was an agreement between the parties that either the specific amount of $154,196 was to be paid to the Applicant or that the Applicant was to be paid a quarter of the work in progress valued at $616,784''. As the Tribunal had specifically found that there was no agreement between the applicant and the other parties to this effect then the amount had not been received as income.
In reliance upon the statements in IT 2551, senior counsel for the applicant pointed to the absence from the facts as found by the Tribunal of any ``detailed calculation of the profit content in the work in progress''. As he put it, ``there was no attempt by the parties to evaluate, to determine, let alone agree upon, a figure that represented the profit component in the outstanding work in progress. There was, in fact, no such figure''. There was no detachment
ATC 4797of a profit component nor any agreement that a figure representing it should be received as payment for the applicant's share in the firm's work in progress as at 30 September 1988. He further submitted, in answer to a submission of the respondent to which I shall make reference later, that even if there was in fact correspondence between the calculations of the worksheet supplied on 21 October 1988 and the figure for net tangible assets in the letter of 4 November 1988 this would not advance the respondent's case. Unless it were proved (and the contrary had been found by the Tribunal) that the applicant had agreed to the inclusion in the net tangible assets figure of the amount of $154,196 as being payment for his share in the calculated profit for work in progress, then it could not be income in his hands.
In short, counsel supported the reasoning and conclusion of the Tribunal, expanding upon it somewhat in terms of IT 2551, to which the Tribunal had not found it necessary to refer.
In response to these contentions, senior counsel for the respondent submitted that IT 2551 did not correctly state the legal principles to be derived from the authorities. Insofar as it required a detailed calculation of the profit content in the work in progress, it went beyond the requirements of the authorities. Insofar as it might be taken to require specific identification by agreement between all the partners of the amount to be paid to the outgoing partner for his share in the value of work in progress, it again went further than the authorities required. It was counsel's submission that no more was required than that the facts should establish the existence of an identified or identifiable amount which was, objectively, paid in respect of the outgoing partner's share in the value of the firm's work in progress. If that was done, then the amount would be received on revenue rather than on capital account. Counsel framed his submission, orally, in the following terms:-
``We say that provided the agreement between the parties sufficiently provided that an amount will be payable to the outgoing partner on account of his interest in work in progress, then the sum so payable is income. It has to be sufficiently identifiable. If there was no more than an agreement that the outgoing partner would be paid a lump sum with no differentiation, then we accept that it is not income.''
Counsel put his submission two ways. First, he contended that on the primary facts as found by the Tribunal, the applicant received the sum of $154,196 as income. This was so, as a matter of law, with the result that the Tribunal's finding to the contrary was based on legal error. Secondly, it was submitted that the Tribunal had made specific errors of law in wrongly construing the phrase ``net tangible assets'' in the letter of 4 November 1988 and had also erroneously construed relevant provisions of the worksheet document. These two submissions were related, insofar as it was submitted that the erroneous construction of the worksheet led to a failure on the part of the Tribunal to find that the amount of $284,365 attributable to ``net tangible assets'' in the letter of 4 November 1988 included, as an identified amount, the figure of $154,196 for the applicant's share in the value of work in progress.
Before considering these submissions, it is necessary to refer to the authorities which have been relied on.
The first is Jamieson, a decision of the Court of Appeal (NZ). The taxpayer in this case had practised in partnership as a barrister and solicitor until 30 September 1968 when, by agreement with his other partners, he withdrew from the partnership. His entitlements upon retirement were arrived at by agreement. Amongst these was an agreed entitlement to a proportionate share of fees on uncompleted and current files for work done to the date of dissolution in respect of transactions, or files not completed at that date. The continuing partners calculated the value of this share. This was done with the agreement of the taxpayer who accepted the amount so calculated. The question for decision was whether that amount, when paid to him, was received on capital or revenue account, it being contended by the taxpayer that the amount paid to him was capital being the price paid for a disposable asset. The Court held, unanimously, that the amount was received as income. The accounts taken as at 30 September 1968 were solely for the purpose of the dissolution of the partnership and the amount in question represented the taxpayer's share of the calculated value of work in progress at that date. It represented the taxpayer's share of the partnership profits to that date and, as such, bore the character of income.
In my view, nothing in the decision turned upon the fact that the amount paid to the retiring partner was calculated in a particular way nor that it was agreed to by the taxpayer. The agreement merely served to identify the amount in question. That agreement did not give it its quality as income, which was attributable solely to the fact that it represented the taxpayer's entitlement to a proportionate share of fees earned.
The next case is Stapleton. This case also involved the retirement of a partner from a firm of solicitors. The firm had a written agreement which, inter alia, provided for each partner's entitlement to work in progress upon retirement from the partnership. Upon the taxpayer's retirement he became entitled to receive a calculated amount which included an amount payable by instalments, over a period of five years, which was in respect of his entitlement to share in work in progress at the time of his retirement. The question for decision was whether amounts received pursuant to this entitlement should be characterised as income or as capital. Sheppard J found the case indistinguishable from Jamieson. His Honour referred with approval (at ATC 4825-4826; ALR 614) to a passage from the judgment of Woodhouse J who had decided Jamieson at first instance. Woodhouse J had concluded his reasons for judgment by saying:-
``The real point of the case before me is not whether the uncompleted work had any present asset value but whether the share in it that was actually credited to the retiring partner was income in his hands. In my opinion it was a revenue or income sum computed to enable a fair and just distribution of the achievements of the partnership up to the date of dissolution.''
His Honour considered that this statement of principle was directly in point. He further said that work in progress was ``an affair of revenue rather than capital. It represents that which will in due course of time become income when the work in question is complete'' (at ATC 4827; ALR 615). His Honour also said (at ATC 4827; ALR 616) ``the receipt is characterised by the nature of the matter in respect of which it was received, that is, work in progress which bore no relation to capital and was directly connected with or related to income''.
Again, in my view, the decision in Stapleton did not turn on the fact that the amount in question had been arrived at by agreement. The agreement served only to identify the amount and its association with work in progress. It took its character as income from this association and not from the fact that it was an agreed figure. Nor does it appear that anything turned upon the way in which the figure was calculated. It was paid in respect of an interest in work in progress and that was sufficient.
The case of
FC of T v Grant & Ors 91 ATC 4608 is in similar vein. It is not necessary to refer to it.
I find myself in agreement with the submissions of senior counsel for the Deputy Commissioner. It is not necessary, in my view, that Mr Crommelin should have expressly agreed that there should be paid to him the amount of $154,196 for his share in the value of work in progress at the time of his retirement from the partnership. It is sufficient if that amount can be otherwise identified as having been paid to him for that reason. Insofar as it is apparent that the Tribunal considered that this amount could not be received by Mr Crommelin as income unless he had made a specific agreement with the continuing partners to receive that very sum or one quarter of the amount of $616,784, then relevant error of law has, in my respectful opinion, occurred. Providing that the amount can be identified as having been paid to him for his share in the value of work in progress, then it will relevantly be income in his hands whether or not he had agreed to receive that specific amount on that account.
Nor, in my opinion, is it to the point that the Tribunal made no findings as to the relevant amount having been arrived at by detailed calculation of the profit component involved in the work in progress as at 30 September 1988. The authorities, in my view, do not bear out this requirement of IT 2551. In any event, the evidence in the case, as I read it, was to the effect that the amounts in question were entirely profit.
I also accept the submissions of senior counsel for the Deputy Commissioner that relevant error of law occurred in the Tribunal's construction of the phrase ``net tangible assets'' in the letter of 4 November 1988. I have set out the relevant paragraphs of the Tribunal's reasons relating to this matter. The Tribunal was not satisfied that Mr Crommelin's share of net tangible assets as shown in the letter, being
ATC 4799$281,195 included as a specific component the amount of $154,196 being, of course, one quarter of the figure of $616,784 which the remaining partners had accepted as the total value for work in progress at the relevant date. For the reasons given in the quoted paragraphs, it is apparent that the Tribunal found that, in arriving at the figure in the letter, the remaining partners, although accepting guidance from the worksheet had not, in fact, specifically included this amount in the figure in the letter.
It is not entirely clear to me what effect this had upon the Tribunal's reasons. It may be that it merely served to fortify the finding that there was not agreement between all the partners as to a figure to be applied to the value of work in progress. If this be so, then it was not a crucial finding as, of course, there was other evidence leading to the conclusion that there was not universal agreement in this regard. However, it may also have had an impact on the question whether the figure in the letter had, in fact, included the amount in question. A finding that it did not would, of course, prevent its having been received as an identified sum relating to work in progress. If this result had been reached as a consequence of the misconstruction of the worksheet then, I would accept, as submitted by counsel for the respondent, that a further relevant error of law had occurred.
I do not find it necessary to set out the relevant portions of the worksheet as, in the event, there was no contest that the Tribunal had, unfortunately, misconstrued the effect of it when reaching the conclusions set out in the paragraphs cited. In short the Tribunal, no doubt as a result of the late introduction into evidence of the worksheet and the absence of any argument in relation to the relevant portions of it, when analysing it after the conclusion of the hearing, fell into error. Counsel for the respondent has indicated, to my satisfaction, that there was a failure to take into account different drawings that had occurred on capital account by the various partners and also other matters. These failures led to the conclusion referred to in paragraphs 41, 42 and 43 of the Tribunal's reasons. However, when proper allowance was made for these matters, which could be done by reference to other items in the worksheet, it became clear that the relevant amount had been included in full and that the balance of the figure of $281,195 shown as the applicant's share of net tangible assets was accounted for by other discrete amounts which would properly fall under this heading.
Accordingly, I am satisfied that the misconstruction of the worksheet led the Tribunal into an erroneous finding that the precise amount for the applicant's one quarter share in work in progress as arrived at by the remaining partners, had not in fact been included in the figure paid to him for his share in the net tangible assets of the partnership as at the date of his retirement. When the worksheet is correctly construed, it becomes clear that it was.
Accordingly, I am satisfied that the amount of $154,196 should have been held by the Tribunal to have been income in accordance with s 25(1) of the Act.
It has been urged upon me that, should I come to this view, I should not take the step of sending the matter back to the Tribunal but should take the same course as taken by the Court in
Statham v FC of T 89 ATC 4070 and in
FC of T v Emmakell Pty Ltd 90 ATC 4319; (1990) 22 FCR 157, namely that I should make the appropriate finding myself. It was pointed out that the case had occupied a number of days before the Tribunal and that the requirement that it be reheard because of demonstrated error of law in the first hearing would be most oppressive to the parties. As I am satisfied that the Tribunal was bound in law to conclude that the sum of $154,196 was income I consider that this is the appropriate course for me to take.
In the result, I consider that it is sufficient if I merely dismiss the appeal. This produces the consequence that the Tribunal's decision affirming the respondent's objection decision is confirmed, albeit for the reasons raised in the respondent's notice of contention and not for the reasons given by the Tribunal. The appeal, however has had an unusual feature. The applicant has relied upon the terms of IT 2551 to argue that the receipt was not income. On the other hand, the Deputy Commissioner has argued against the position stated in IT 2551, in asserting successfully that, despite its terms, the receipt was on revenue account. In my view, in all the circumstances, each party should bear his own costs of the appeal.
THE COURT ORDERS THAT:
1. The application be dismissed.
2. Each party to bear his own costs of the application.