Case L9

Members:
AM Donovan Ch
LC Voumard M
G Thompson M

Tribunal:
No. 2 Board of Review

Decision date: 5 March 1979.

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A. M. Donovan (Chairman); L. C. Voumard and G. Thompson (Members): The question for decision in this reference is whether the sum of $21,918, being alleged profit on the sale of some 500,000 shares in a mining company, N.L., was properly included in the assessable income of the taxpayer for the year ended 30th June, 1975. The taxpayer is a company incorporated on 11th April, 1973, and is described in the taxpayer's return as ``Farmer and Property Owner''.

2. At the hearing, evidence was given on behalf of the taxpayer company by an accountant and tax agent, and also by a director of the company, Mr. C, who made the required decisions on its behalf and can well be said to represent the mind and will of the company. See
H. L. Bolton (Engineering) Co. Ltd. v. T. J. Graham & Sons Ltd. (1956) 3 All E.R. 624 at 630.

3. The subject shares were sold by the taxpayer on 28th May, 1975, for the sum of $26,946, and had been acquired on 29th June, 1973, for $5,028. The taxpayer claimed that the said shares were acquired as an investment and not for resale at a profit. The reason given for sale in the return of the taxpayer was ``unsolicited offer to purchase and requirement of funds for capital projects''. The Commissioner in his Reg. 35(1) statement claims that the profit arising from the said sale of shares constitutes assessable income by virtue of the operation of sec. 26(a), or alternatively sec. 25(1) of the Act. The said shares were of a kind which could well be regarded as of a speculative nature.

4. Various detailed grounds of objection were taken by the taxpayer to the assessment of the Commissioner and certain notes are appended to those legal grounds which set forth the facts of the situation which resulted in the sale of the shares. These additional reasons which appear to support the information given briefly in the return allege certain facts concerning other properties held by the company which indicate that funds were required by the company and that, in relation to certain improvements and additions to certain premises, the costs were in excess of previous estimates and the directors were placed in a position where they had to decide to restrict the project or realise on other assets.

5. At this juncture it was claimed that an unsolicited offer to buy the subject shares was received. Initially this offer was rejected, but after a further approach, the directors resolved to sell the said 500,000 shares, which sale was effected through a broker on 28th May, 1975. A balance of some 139,500 shares of the same kind remained in the company.

6. Further reference is then made to the other business activities of the company, namely farming operations. It was said that the taxpayer has not derived income from dividends but it holds shares for that purpose. Evidence relating to the above matters was given at considerable length and in detail by the abovementioned director of the company. It seems to us, therefore, that in cases of this kind which involve questions of fact and degree in the assessment of the whole of the evidence, the credibility and reliability of the principal witness becomes of great practical importance. The oral evidence of the witness must be weighed and tested in the light of the objective facts and relevant documentary evidence. This will lead to an analysis of the alleged overall policy of the company to acquire assets on a capital basis with long term investment in view,

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consistent with its description of a holding company engaged in investment transactions.

7. It appears from the evidence of the tax agent who gave evidence that the taxpayer is a small company formed in 1973 which did not have a great number of transactions. Its activities related to the purchase and sale of cattle which were run on one of the properties, and these cattle were apparently held for a period before sale. Also there was income from rents derived principally from city properties, which have been improved after purchase by the use of funds borrowed from the aforementioned director and others associated with him. This witness also deposed that the pattern of business of the taxpayer company is more of a long term venture and not to make immediate profits. The assets from which the income will in time be derived are being built up over the years.

8. This witness went on to describe the broad nature of the assets of the company as principally real estate in the city and also areas of land in the country. In addition there are shares, the subject of this hearing, another mining company and two other companies. In cross-examination the representative of the Commissioner elicited detailed evidence of other transactions by the company, including future transactions. Although all of these transactions are relevant in a case of this nature, and can in a proper case paint a picture adverse to the taxpayer, in the view that we have taken of the whole of the evidence, and the submissions both on behalf of the Commissioner and of the taxpayer, we are of opinion that they will not prove to be decisive in favour of the Commissioner against the taxpayer. This witness, a tax agent, is in the role of disinterested witness, and in our view there is no reason to doubt his credit on the matters deposed to by him, which are either within his knowledge or are the proper subject of accounting conventions.

9. The director referred to previously, who also gave evidence at length, described himself as chairman of the company. He is also a solicitor, and is the person who virtually directed and effected all transactions on behalf of the company, since its incorporation. He described the company as basically a family company, and the purpose of incorporation was solely to enable the family (himself, his wife and his father-in-law) to hold assets primarily for the two children of the marriage. He is also a share trader, and does ``a lot of business'' in the city where the family resides. He gets on very well with the commercial sector and has been enabled to use his contacts and various banks to expand the activities of the family company. This witness then continued to expound the activities and intentions of the company in detail. We do not deem it essential to recite all of these details.

10. Suffice it to say that the impression one obtains from his evidence is that he is an able and energetic businessman and entrepreneur in his own right, which role he was at pains to distinguish from his decisions and dealings on behalf of the family company, the taxpayer. He was particularly adamant that the subject share purchase was not made for the purpose of making any profit; rather was it made in the belief that the holding would give him control over the company and its activities, and a seat on its board. He further emphasised that he kept his own share trading transactions quite separate and apart, and has paid income tax as a result of these sales.

11. This director also exhibited a very sound knowledge of the share market, including mining shares, and described to the Board in some detail and with force his modus operandi in relation to buying and selling land and shares, and also his methods of developing properties, and his business thoughts on the share market. After observing his demeanour in the witness box during some length of time, and hearing his evidence, we have come to the conclusion that he is a persona sui generis, or rather a businessman with very personal and special attributes and ideas. This, in our opinion, brings him out of the usual category of taxpayer, and thus we have concluded that his evidence ought to be accepted on the balance of probabilities. We would regard this case as being in the nature of a special individual case unlike the normal examples with which Courts and Boards come in contact concerning assessments pursuant to sec. 26(a) or 25(1) of the Act.

12. Indeed, from his evidence we gained the impression that, despite other important business commitments on or about the day of hearing, he regarded it as a matter of principle to attend the hearing in order to demonstrate his various views expressed. Our broad impression therefore is that, despite some other features in the case, and his other share trading and wide business dealings, he has discharged the onus of proof in the company's favour.

13. We do not overlook the matters raised in a detailed and very relevant cross-examination of this witness undertaken by the

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representative of the Commissioner. The exhibits before the Board bear witness to the scope and intensity of his cross-examination. He embarked upon a wide survey and exact scrutiny of the taxpayer's activities, and tested the credit of the principal witness in detail. The Commissioner's representative also made submissions on fact and in law to the Board which would otherwise bear great weight had a different view of the special nature of the business activities of the said witness and of his credibility been taken. In short, after reflecting further upon the whole of the evidence, we feel constrained to hold that the evidence of the said witness should be accepted.

14. Accordingly, in our opinion, the objection of the taxpayer company should be allowed.

Claim allowed