Albion Hotel Pty Ltd v Federal Commissioner of Taxation

(1965) 115 CLR 78
13ATD435

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(Judgment by: Windeyer J.)

ALBION HOTEL PTY. LTD.
v FEDERAL COMMISSIONER OF TAXATION

Court:

Judge:
Windeyer J.

Judgment date: 3 February 1965

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Judgment by:
Windeyer J.

These are five appeals under the Income Tax and Social Services Contribution Assessment Act 1936-1963 (numbered 32, 33, 34, 35 and 36 of 1964 in the South Australian Registry of this Court) against assessments of tax in respect of the years ended 30th June 1955, 30th June 1956, 30th June 1957, 30th June 1961 and 30th June 1962. In four cases the appeal is against an assessment of primary tax and also an assessment made under Pt III Div. 7 of the Act. In the other case, No. 35, the appeal is against the assessment under Div. 7 only.

The question in each case depends upon the validity of a claim by the appellant company to deduct, pursuant to s. 51 (1) of the Act, a sum said to represent a liability for interest payable to A. E. & F. Tolley Limited, the parent company of the taxpayer, which liability the taxpayer claims was necessarily incurred by it in carrying on its business of a hotel proprietor. None of the sums that the taxpayer thus claims as a deduction has been actually disbursed by it. But it is said that in each of the years in question a liability was incurred under an agreement in writing bearing date 26th March 1954 but, in fact, executed on 30th April 1956. This document was disclosed to the Commissioner in November 1958. He then took it at its face value and treated the taxpayer's claim to a deduction based upon it as valid. Then, as the result of an inquiry that he made in December 1962 the Commissioner learnt more of the matter; and in assessing the taxpayer in respect of the year ended 30th June 1962 he disallowed the deduction claimed. The assessment of primary tax for the previous year, that ended 30th June 1961, had issued on 15th February 1962 and the Commissioner did not seek to re-open it. But the Div. 7 tax for that year was not assessed until 26th August 1963 and in assessing it the deduction was disallowed. The assessments for 1959-1960 and 1957-1958 were not re-opened, the time within which an amended assessment might be issued having passed. But no tax had in fact been assessed for the years 1954-1955, 1955-1956 and 1956-1957, the deduction claimed, and at that time conceded by the Commissioner, having in those years produced a loss. Therefore when the Commissioner, with a more complete knowledge and a different appreciation of the facts, decided that the deduction claimed was not allowable it was open to him to issue an original assessment in respect of those years: see Batagol v. Commissioner of Taxation (1963) 37 ALJR 235 .

I may say at once that I have come to the conclusion that the taxpayer has not made good its objections to any of the assessments; and that, as I view the matter, the deduction claimed was properly disallowed. As this conclusion involves disregarding, in part at all events, the terms of a written document, I shall set out in some detail what seem to me to be the salient facts - as given in evidence or stated and agreed upon by counsel or as I infer them from the evidence.

A. E. & F. Tolley Limited, a company which I shall call "Tolleys'", is a wine and spirit merchant carrying on a long-established business in South Australia. It owns several hotels in that State which are let to publicans under ties binding them to buy their supplies or part of their supplies from Tolleys'. In 1953 the directors of Tolleys' were seeking a further outlet for its wares and became interested in a project of setting up a new hotel at Kilburn, an outer suburb to the north of the City of Adelaide. There had been a considerable growth of population in that district. And there was some prospect that the sewage farm, which occupied a considerable area on the outskirts of the neighbourhood, would be moved. This had long been mooted. If it happened, more houses would probably be built and Tolleys' might expect further customers for a hotel. But there was only a possibility that this would happen in the near future. In fact the sewage farm is still there. Although a good deal was said about it by counsel, I do not think that an expectation that the sewage farm would be moved was an important factor in the proposal to build the hotel, or that if it were it has much bearing on this case. The proposal to set up the hotel was attractive and feasible. The result of a local option poll under the Licensing Act was in favour of an increase in the number of hotels in that neighbourhood. Tolleys' therefore bought land at Kilburn and procured its nominee, one J.A. Roberts, to apply for a publican's licence in respect of an hotel to be built upon its land. On 10th July 1953 a written agreement was entered into between Tolleys' and Roberts by which, if the licence were granted, Roberts was to have a lease of the premises for five years, the rental to be based on the amount of beer sold. The agreement provided that Tolleys' might transfer the land and assign the agreement "to such person, firm or company whether now or hereafter incorporated as it may think fit".

When the matter was before the Licensing Court the managing direct or of Tolleys', Alfred Frank Hocking gave evidence in support of the application and stated what was Tolleys' part in it. He said that Tolleys' expected to get about 5,000 pounds a year from the hotel. In evidence before me he said that Tolleys' always expected to get a ten per cent return on the money it put into the project; and that it had been thought that the cost of the hotel would be "roughly round the 60,000 mark pounds". He said that Tolleys' had been "aiming to get a ten per cent return".

The application for the licence was approved, and in March 1954 the building of the hotel began. It was never intended that Tolleys' would itself conduct the hotel. Indeed it seems that under the South Australian licensing law it could not have done so because an hotel, I was told, cannot be conducted by a company, unless it be a company whose sole object is to do so. Tolleys' intention as stated in evidence before the Licensing Court was that the hotel should be owned by it and leased, as its other hotels were, to a lessee, Tolleys' receiving rent, and of course gaining the advantage of the trading tie. But at some stage it was decided by Tolleys' that it would not itself be the owner of the hotel and the lessor to the publican, but that a subsidiary company should be formed to take over this role. To this end the taxpayer in these proceedings, Albion Hotel Proprietary Limited, which I shall call "Albion", was incorporated on 9th March 1954, apparently just before building commenced. The site was conveyed by Tolleys' to it.

Albion was set up by Tolleys' with a paid-up capital of 250 pounds. The shares are all owned by Tolleys'. The directors of Tolleys' are directors of Albion. It is completely under the control of Tolleys'. In a business sense it is a department of the total enterprise of Tolleys'. Asked in cross-examination for the reason for the decision that a separate company be formed to own the hotel, Hocking said "It is a nice, tidy way of doing it. Everybody is doing it". He was reluctant to admit that any consideration of taxation advantages had entered into the decision. But that there would be such advantages is not disputed. There were, however, several other advantages for Tolleys' in having the hotel owned by a subsidiary company. I do not think that any inference adverse to the taxpayer in these proceedings can be drawn from the mere fact that Tolleys' chose to set it up and to make it the legal owner of the hotel. It, Albion, is the tool of Tolleys' and was created to be its tool for reasons that were not exclusively or probably even primarily the avoidance of tax. Moreover, the motives and purposes of Tolleys' in setting up Albion are I think largely irrelevant to the question I have to decide. It is Albion's tax that is in question, not Tolleys' tax. The case depends not upon Albion's having been brought into existence as a taxpayer, but upon its affairs and transactions, although these are, I agree, to be regarded in the light thrown upon them by its relationship with Tolleys'.

Albion having been incorporated, the building of the hotel went ahead. It is conceded that the building costs were actually disbursed to the builder by Albion as the building proceeded, and that Albion also paid 2,000 pounds from its bank account to Tolleys' for the land. These payments were however made out of moneys from time to time paid by Tolleys' into Albion's bank account for the purpose. It seems to have been assumed by those in charge of the affairs of Tolleys' and Albion that these moneys were to be regarded as advances on loan. But I am not persuaded that at the time they were made there was any stipulation or understanding as to the terms of repayment or as to interest to be charged.

The hotel was finished and opened on 18th December 1954. Albion, by a duly registered memorandum of lease, leased the hotel for a term of five years from 17th December to a company, J. A. & M. S. Roberts Limited, that Roberts had formed. It was decided by those in control of the venture that Albion should not be merely the lessor of the premises but should become a dealer in Australian beer and that it would supply the lessee's requirements of this commodity. The rent was expressed in the lease to be 10 pounds per week, with a proviso that in the event of the purchases of Australian beer, ale, lager and stout by the lessee from the lessor being less than fifty-five units of eighteen gallons in any week the rental was to be increased by an amount computed by multiplying 2 pounds by the difference between the number of such units purchased by the lessor during such week and fifty-five, with an adjustment in cases when the purchases from the lessor should exceed fifty-five units in any week. The lessee covenanted to buy its supplies of Australian beer from the lessor or its nominee and from no one else; and to buy its supplies of other liquors and of tobacco from Tolleys' and from no one else. An agreement dated 30th December made between the lessee, J. A. & M. S. Roberts Limited, and Albion reads as follows:

"Whereas the dealer is carrying on business as a merchant of beer, ale, lager and stout and whereas the dealer has agreed to lease the premises known as the Albion Hotel to the Hotelkeeper And Whereas the Hotelkeeper has agreed as a condition of the letting to purchase all Australian beer, ale, lager and stout whether bottled or draught from the dealer Now It Is Hereby Mutually Agreed as follows:-

1.

Nothwithstanding anything in the said lease contained the price payable by the Hotelkeeper to the dealer for Australian bottled beer, ale, lager and stout shall be the cost thereof to the dealer together with freight cartage and any other outgoings incurred by the dealer in respect thereof.

2.

Nothwithstanding anything in the said lease contained the price payable by the Hotelkeeper to the dealer for Australian draught beer, ale, lager and stout shall be the cost thereof to the dealer together with freight cartage and any other outgoings in respect thereof and together with the sum calculated at the rate of 2 pounds/-/- for each unit of 18 gallons of draught beer, ale, lager and stout Provided That such last mentioned sum shall not be payable in respect of any of such units purchased by the hotelkeeper from the dealer in excess of 2860 for any period of twelve months commencing on the 17th day of December in one year and ending on the 17th day of December in the next year during the continuance of this Agreement.

3.

This Agreement shall remain in force until the expiration or sooner determination of the said Lease."

The first clause of this agreement seems hardly consistent with the second. The parties apparently treated the second as the binding provision. Exactly how the rental provisions of the lease and the agreement were read together by them is not, I think, entirely clear. But it appears from the annexures to the income tax returns of Albion for the years 1954-1955, 1955-1956 and 1956-1957 - and I assume until the expiration of the lease in December 1959 - that supplying beer to the hotel yielded Albion a considerable profit, as shown by its trading accounts.

On 30th April 1956 a document was executed under the common seals of Tolleys' and Albion purporting to be an agreement between them and bearing the date 26th March 1954. I shall set it out in full because it is the critical matter in the case.

"Memorandum of Agreement made the 26th day of March, 1954 Between A. E. & F. Tolley Limited of Waymouth Street Adelaide in the State of South Australia (hereinafter with its successors and assigns called 'the Lender') of the one part and Albion Hotel Limited of Waymouth Street Adelaide aforesaid (hereinafter with its successors and assigns called 'the Borrower') of the other part Whereas the Lender has advanced sums of money to the Borrower amounting in all to Sixty Six Thousand Pounds (66,000 pounds /./.) (hereinafter called 'the principal sum') to enable the Borrower to erect a Hotel at Churchill Road, Kilburn known as the 'Albion Hotel' upon and subject to the terms and conditions hereinafter set out and whereas the parties hereto are desirous of reducing such terms and conditions to writing Now This Agreement Witnesseth and in consideration of the said advances It Is Hereby Mutually Agreed As Follows:

1.

The Borrower shall pay to the Lender the said principal sum and all interest upon demand being made in writing by the Lender and given to the Borrower at its last known place of business.

2.

Until the Lender shall make a demand in accordance with the preceding clause hereof the Borrower shall pay to the Purchaser the sum of One Thousand Two Hundred and Fifty Pounds (1250 pounds/./.) on account of the principal sum on the last days of the months of March, June, September and December in every year the first of such payments to be made on the 31st day of March, 1955.

3.

During the continuance of this agreement the Borrower shall pay to the Lender interest upon the principal sum or so much thereof as shall remain owing computed from the respective times of each part of the principal sum being advanced or paid at the rate of Eight Pounds (8 pounds/./.) per centum per annum and all such interest shall accrue from day to day and shall be payable on the last days of the months of March, June, September and December and the first of such payments to be made on the 31st day of March, 1955.

4.

During the continuance of this agreement the Borrower shall pay to the Lender interest upon all amounts of interest accrued hereunder as shall be unpaid on the 30th day of June in every year at the rate of Eight Pounds (8 pounds/./.) per centum per annum and all such interest shall accrue and be payable from day to day.

5.

All quarterly payments made hereunder shall be appropriated by the Lender first in payment of the quarterly instalment of principal and next as to the balance in a towards payment of interest."

This document is remarkable in several respects. In the first place no explanation was given of why it was brought into existence when it was, on 30th April 1956. The managing director of Tolleys', Mr. Hocking, who as a director of Albion signed it as a witness to the affixing of the seal of that company, could give no satisfactory explanation. Although he is an experienced businessman and a qualified accountant, he seemed to have no precise recollection of how the document on which so much turns came to be drawn up and to bear the date it does - "I suppose", he said, "that for some reason or other that it was prepared by our solicitors". The document was prepared by the company's solicitors. It bears their name on the backsheet. Mr. Hocking at one point in his evidence suggested that he gave instructions for its preparation, but he was far from definite on this. The date 26th March 1954, inserted in the typewritten document, is in the handwriting of Maxwell Arthur Frogley, the secretary of both Tolleys' and Albion. His signature appears as a witness to the affixing of the seals of both companies. Entries in the books of account of both companies are in his handwriting. It was he who signed the income tax returns. Several matters adverted to in the course of the hearing could, it seems, have been explained by him. But the taxpayer preferred not to offer him as a witness. He was called on subpoena duces tecum and produced some documents. It was said that he was to be called later as a witness on behalf of the taxpayer: but he was not. What led him to write in "26th March 1954" is thus beyond even guessing. Neither of the counsel nor Mr. Hocking could suggest an explanation. March 1954 was, it is true, the month in which Albion was incorporated; and on 12th March the first advance 3,000 pounds was made by Tolleys' to Albion.

But why 26th March? Mr. Hocking said that the document recorded an arrangement that had been made "before December 1954" but that "it was delayed until all the accounts were paid so that the to tal loan money was definite . . . ". But his evidence on this aspect was not convincing. It would be unfair to him to regard what he said as an explicit assertion that the terms set out in the agreement had in fact been determined by the directors at the outset of the project. The date 26th March is inconsistent with the recital in the document that "the lender has advanced sums of money to the borrower amounting in all to sixty-six thousand pounds 66,000 pounds", although that statement had a measure of truth as at 30th April 1956, the date when the document was in fact executed. The bank statements of Albion show payments made to it by Tolleys' as follows:

The ledgers of both Tolleys' and Albion also show these sums as paid by one and received by the other. There are some discrepancies in the dates: in particular the last amount, 3,000 pouns, which according to the bank statements was paid into Albion's account on 11th April 1965, is shown in the books of Tolleys' against the date 30th April and in the books of Albion against the date 30th June. However, the total amount is 66,000 pounds by all accounts. But this amount was not owing by Albion to Tolleys' when the document was executed on 30th April 1956, because by that date four repayments had already been made, as appears by the books of both Tolleys' and Albion which, apart from some minor differences in dates, are in this matter in accord one with the other and in accord too, I was informed, with the bank statements. These repayments, taking the dates as they appear in Albion's books, had been as follows: 30th June 1955, 2,500 pounds; 11th October 1955, 1,250 pounds; 31st March 1956, 1,250 pounds (according to Tolleys' books this was on 31st January); 30th April 1956, 1,250 pounds. By the date the document was executed the 66,000 pounds had thus been reduced by 7,500 pounds. And of course as at 26th March 1954 only 3,000 pounds had been advanced. It seems impossible to reconcile the statement in the document with the facts at either date or indeed at any date. (In 1959 Tolleys' made some further payments in connexion with a drive-in which were the subject of separate repayments by Albion; they do not enter into this case.)

The only thing that is certain is that the document was shown to the Commissioner at some time in November 1958. It was then described to him by the taxpayer as "an agreement dated 26th March 1954", and the fact that it had not been executed until two years thereafter was not, it seems, then made known. As late as January 1963 the taxpayer in a letter to the Commissioner called it "the agreement of 26th March 1954". In directors' minute books of Tolleys' and of Albion there is no reference to the agreement that the document purports to embody. And the only reference to the document itself in the books of either company is a record in the sealing books of each showing that it was executed under their common seals on 30th April 1956. It is this entry that fixes that date as the date of its execution. It may be that what prompted its preparation and execution at that time was that Albion had on 12th April 1956 lodged a return of income for its first year, that which ended 30th June 1955, that in it it had claimed a deduction for interest payable to Tolleys', and that it had no document to support this claim.

It seems to me that, without resorting to the written document, it is a reasonable inference that the moneys found by Tolleys' for Albion should be treated as money lent and that the payments by Albion to Tolleys' should be treated as repayments of the capital by instalments. This view of the matter is supported to some extent by the evidence of Hocking, and it accords with entries in the books of each company and by transactions on their bank accounts that occured before the execution of the document. It is, I think, more probable than not that at some time the directors of Tolleys' and of Albion had decided that from the profits of Albion periodic quarterly payments of 1,250 pounds should be made to Tolleys' by way of reimbursement. Clause 2 of the document might, if it stood alone, be in truth a reduction to writing of an antecedent decision. Yet, even so, there is a difficulty in the statement that the first of such payments was to be made on 31st March 1955, because at the date when the document came into existence that date had long passed and no payment had been made by Albion to Tolleys' on that date. The first payment, on 30th June 1955, was for 2,500 pounds. This, it is now said, was meant to represent two payments of 1,250 pounds, one having become due on 31st March. But there is really no evidence of that. Apart from the document, the only conclusion that I think the evidence supports is that there was some arrangement for an initial payment of 2,500 pounds in June 1955, and that at approximately quarterly intervals thereafter the sum of 1,250 pounds was to be paid. It is true that there is in Albion's journal an entry which reads:

"1955 June 30. Interest Payable 4066 pounds 7.8 to A. E. & F. Tolley Ltd. being interest at 8% on (some figure deleted) advances from A. E. & F. Tolley Ltd. from Mar 15 1954 to Dec 22 1954".

And among the closing entries to profit and loss account bearing the same date there appears: "To interest Payable 4078 pounds 17.8". But counsel for the Commissioner did not concede that these entries were made on or about the date they bear. He questioned this in his cross-examination of Hocking. Counsel for the taxpayer said he proposed to call Mr. Frogley, who made all the relevant entries in both Tolleys' books and Albion's books, to say when they were in fact made. But, as I have said, Frogley was not called. In these circumstances I cannot feel sure that any entry relating to interest was made before April 1956 - the month in which the income tax return for the previous year was lodged and in which the document that is relied upon in fact first came into existence. I am not satisfied that before the document came into existence there had been an agreement for the payment of interest as it states there was. And I am not satisfied that the document was really intended to create a legal obligation on the part of Albion to pay interest on the terms set out. But before looking further at the document one other event must be mentioned.

The first lease expired on 17th December 1959. Thereupon a new lease for five years was granted to the lessee, J. A. & M. S. Roberts Limited, by a memorandum of lease dated 5th February 1960. The rental under this second lease was 135 pounds per week, with no provision this time for any variation dependent on the amount of beer sold. The new lease contained covenants similar to the terms of the agreement of 30th December 1954, whereby the lessee was to buy its requirements of Australian beer, etc. from the lessor or its nominee and of other liquor and tobacco from Tolleys'. But I was informed that, apparently about the time when the first lease expired, Albion ceased to supply Australian beer to the hotel, and this provision in the new lease seems to have been disregarded. The accounts annexed to the income tax returns for the years 1960-1961 and 1961-1962 therefore contain no trading account; and it would appear that the taxpayer's only substantial revenue in those years was the rent it received.

Reverting to the document: It is necessary to remember that it is not like an agreement between two companies whose only relation with one another was in business dealings between them. Albion is Tolleys' creature formed to do its bidding. Tolleys' had gone into the hotel venture hoping to get a return of ten per cent on the moneys it invested. Yet the document states that the directors had committed Albion to an obligation to pay off the capital at the rate of 1,250 pounds per quarter and at the same time to pay compound interest at the rate of eight per cent with daily rests. In no year was the gross revenue of Albion enough, or anywhere near enough, to pay both amounts. And it is hard to see how it could have been thought that it ever would be enough. Tolleys' and Albion, being of course of one mind, are said to have regarded the document as meaning that no interest was actually payable unless an express demand for it were made by Tolleys', but that nevertheless it was to be compounded. It was suggested that this was what cl. 1 meant. But that clause as I read it deals with the period of the loan, by providing that the whole debt, capital and all accrued interest, might be called up at any time. It does not mean that no interest should become payable unless demanded. Clause 3 makes interest payable quarterly and on the same days as the quarterly payments of 1,250 pounds. This obligation to pay does not wait upon demand. The quarterly payments were to be appropriated by Tolleys' first to principal, a reversal of the ordinary rule that, except as between banker and customer on an overdrawn account, interest is presumed to be paid before principal. In the result, therefore, Albion claimed as a deduction each year a steadily mounting sum for "interest payable to A. E. & F. Tolley Ltd." - but it never paid nor was asked to pay any of it. The payments of 1,250 pounds that it paid at more or less quarterly intervals did not appear in its profit and loss appropriation account.

They were treated as capital repayments. But it did not in its income tax return show any item as capital expenditure in the space provided for doing so. In some years there was a surplus in its profit and loss account after debiting the interest payable to Tolleys'. When this occurred it declared a small dividend and paid it to Tolleys' in order to avoid a liability for tax under Div. 7.

Looking at the whole of the circumstances, I do not think that the document records an agreement that the parties to it, Tolleys' and Albion, really intended should govern them. Everything about it seems to me to point to it having been entered into without an intention on their part to act upon it according to its terms. By 30th June 1962 the balance sheet of Albion showed that its capital debt to Tolleys' had been reduced to 28,500 pounds, but its alleged debt for interest, compounded over eight years, amounted to 40,928 pounds. Yet nowhere in Tolleys' books is there any reference to a liability of Albion to Tolley's for this sum. It is not mentioned in any balance sheet of Tolley's, either expressly or among sundry debtors or in any way. Counsel for the taxpayer did suggest that one would not expect it to appear. But, without going into some accountancy aspects on which he addressed me, I can only say that a company which is owed 41,000 pounds by another company which is solvent - the debt being either due and payable, or payable on demand - and which does not in its balance sheet show it as an asset, does not in my opinion present a true picture of its financial position to its shareholders. It is not suggested that it was omitted because it was a bad debt. Hocking said that was not the reason.

I do not reach the conclusion that the books of account and balance sheet of Tolley's were incorrect. I prefer the view that they were correct in omitting any reference to the supposed indebtedness of its subsidiary Albion. It is the balance sheet and books of Albion that it seems to me are not correct.

Mr. Hocking said that there was no agreement between Tolleys' and Albion that interest provided for in the document would not be claimed or need not be paid. I accept his statement that there was no express agreement between the companies that the terms of the document were to be disregarded. But that is not quite the point I think. Neither is it decisive to ask, as was suggested, whether in an action for interest brought by Tolley's against Albion the defendant would be allowed to give evidence to contradict the written document. Even in such a case evidence might be given that the document was merely colourable, never intended by the parties to be operative according to its tenor: see cases referred to by Jordan C.J. in Perpetual Trustee Co. v. Bligh (1940) 41 SR (NSW) 33 , at p 39 . Moreover the question in the present case is not what answer Albion could make in an action by Tolley's, if one imagines such a happening. It is what answer it can make to the Commissioner's assessments, the onus being upon it to show them to be incorrect. The question whether the document embodies and records a real agreement or whether it is a sham or a cloak does not have to be resolved by hearing only what the parties say of it but by considering the evidence as a whole. A passage from the speech of Lord Herschell in Universal Stock Exchange v. Strachan [1896] AC 166 , at pp 172, 173 is apposite, although the question arose there in a different context. He said:

"The case on behalf of the appellants is this: that when you look at the documents which contain the contract between the parties you see that these were not upon the face of them gaming contracts, but on the contrary appeared not to be gaming contracts, that there was no evidence of anything passing between the plaintiff and the defendants to the effect that the real transaction should not be such as they represented, and consequently that there was no evidence to go to the jury. I cannot accept that view. I think the character of the documents themselves coupled with the nature of the transactions entered into, the position of the parties who entered into them, and other circumstances which I need not detail, raised a question for the jury whether these were real transactions of commerce or whether they were a mere gambling for differences."

Counsel for the Commissioner described the document here as a sham. And in the sense in which the word "sham" is commonly used in this connexion I consider the description to be justified. But I do not wish to convey thereby any imputation of dishonesty. Those who controlled the affairs of the two companies may have believed that, by executing the document and making entries in Albion's books, they could produce a consequence by which they avoided taxation, yet disregard the document in the actual conduct of their enterprise. Mr. Hocking said: "Once having set out that agreement we have kept to it letter by letter". And it is true, as I have said, that there are entries in the books of Albion that accord with it. But entries in books of account should evidence real transactions. They are evidence only. Their proper purpose is to record transactions having legal consequences. Making entries does not make such transactions. In considering what were in reality the relationships between Tolley's and Albion, I must have regard not only to what they wrote but what they did. I must regard not only the presence of entries in their books, but also the absences of entries.

I should add, however, that if the written agreement was in no sense suspect, it is doubtful whether (interpreted as it is said it was by the parties to it and as it was submitted it was properly to be interpreted, namely as creating a debt for interest only when there was an express demand) it would justify Albion's case that the deductions it claimed were necessarily incurred in carrying on Albion's business in the years in respect of which they are claimed: cf. Federal Commissioner of Taxation v. James Flood Pty. Ltd. (1953) 88 CLR 492 , at p 507 . It is not without significance that in answer to a question in a letter from the Commissioner (of 13th December 1962) asking, "If no interest has actually been paid, state the reasons why the arrangement to pay interest as per Memorandum of Agreement dated 26th March 1954 has not been carried out", the taxpayer answered, "No demand in writing has been made by the lender". And to a request for "Details of any agreement with A. E. & F. Tolley Ltd. that interest should be allowed to accumulate instead of being paid", the taxpayer replied, "The Agreement of 26th March 1954".

In the view I take no question arises under s. 260 of the Act. I dismiss the appeals and confirm the assessments.