Federal Commissioner of Taxation v Clarke

(1927) 40 CLR 246
(1927) 1 ALJ 287
(1927) R and McG 115
[1927] WL 22923

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(Judgment by: Rich J.)

Federal Commissioner of Taxation
v Clarke

Court:

Judges: Isaacs A.C.J.
Higgins J.

Rich J.

Hearing date: 12-14 October 1927, 17-21 October 1927, 24 October 1927.
Judgment date: 24 November 1927.

Sydney

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Judgment by:
Rich J.

This appeal relates to the liability of the respondent for income tax upon a large sum of money which arose from the sale of a number of shares in the Badak Company and the Bux Syndicate. The shares in question had multiplied from a few original shares in a small Badak company and in a Bux syndicate. These original shares were at the time when they were taken up of small value. The shares which grew from them were sold on the share market at extraordinary prices. The respondent incurred the odium which always attaches to those who take part in the successful sale of mining shares on an excited market which afterwards collapses. The sudden accession of himself and his family to comparative wealth excited sufficient public prejudice to give rise to a prosecution of himself and two promoters of these concerns for conspiracy. They were, however, acquitted.

The learned primary Judge, in consequence, approached the examination of the respondent's evidence and the facts of the case with all due suspicion and criticism. His Honor says:-

"The hearing of this appeal has necessarily involved a prolonged investigation of facts which occurred in 1919 and 1920. It has occupied a long time, and so far as I can judge every source of information has been explored with great thoroughness. In the result I can feel no doubt upon any important question of fact, the only difficulties in the case being, in my opinion, questions of law, to which I shall refer later. The question of the appellant's bona fides has necessarily been in the forefront throughout and I could not but approach this question with a very critical mind, having regard to the dubious nature of the undertaking of the two companies and the appellant's close association with their promotion and management. Nevertheless I am satisfied of the substantial truth of the appellant's story as regards his dealings with his family. Prolonged observation of the appellant in the witness-box has chiefly led me to that conclusion, and wherever confirmation might reasonably be hoped for so many years after the event it has, in my opinion, been forthcoming. The deficiencies in the evidence on matters of fact have been no more, in my opinion, than necessarily occur in any inquiry into details of events which occurred seven and eight years ago. The methods pursued by the appellant in 1920 were obviously not devised with an eye to the requirements of legal evidence but were the most natural methods in the circumstances. He had a large family still living with him and unprovided for. He was the natural guardian of the interests of his wife and the younger sons and daughters and was familiar with mining affairs and in close touch with other speculators and brokers. What is more important still, the entire family appear to have lived with the appellant on terms of affection and complete confidence."

We in turn were invited to examine in full once again the credibility of the respondent and his witnesses, whom we had not seen-I was a reluctant party to a meticulous and exhaustive investigation of every fact and document which could conceivably be used to throw light on the circumstances in which the material facts occurred eight years ago. In addition we thoroughly examined the books and contract notes of many stockbrokers for the keeping of which the respondent was not responsible. This evidence, both admissible and inadmissible, so far from displacing the learned Judge's conclusion completely confirmed his findings. Matters which, when divorced from the context and considered apart from other material, might seem to found an argument to the contrary could not survive a reasonable understanding of the evidence as a whole. This is well illustrated by the observation of the learned primary Judge in relation to the supposed inconsistency and discrepancy upon which Sir Edward Mitchell mainly relied:-

"As regards what were believed to be the incorrect and inconsistent statements by the appellant and his son in April 1926 and prior thereto upon the question as to whether the appellant was or was not repaid his outlay on the sons' behalf, these were relied upon before me mainly as affecting the credit of the witnesses concerned. It was not, I think, contended that the fact of repayment would have any importance one way or the other upon the question of the taxability of the appellant. As going to credit I have been satisfied that there have always been and still are to some extent uncertainty and difference of opinion on the part of the appellant and his sons upon this question of fact. In the numerous transactions resulting in such large benefactions to the appellant's wife and family, occurring as they did within a short space of time and contemporaneously with numerous other transactions whereby very large profits accrued to the appellant himself, it does not seem to me surprising that the question whether the appellant ever received payment or credit for his original comparatively small outlay should be a difficult one to answer after the lapse of years unless there has been some contemporary record-and the more so because at the time, considering the large sums of money flowing in, none of the parties would have been likely to regard the adjustment of such a sum as of any moment. It has now been proved that much the greater part of the father's outlay on behalf of his sons, namely £540, was repaid to him, but there remain conflicting beliefs as to the balance-a point upon which I have already stated my findings."

With this view I thoroughly concur.

Compelled as I was to embark upon this independent and adventurous voyage of discovery without the advantage of the mariner's compass possessed alone by the learned Judge who saw and heard the witnesses, I have arrived at exactly the same conclusion as his Honor. I am, of course, at liberty and, indeed, am bound to draw my own inference from the facts (Mersey Docks and Harbour Board v. Procter; Montgomerie & Co. v. Wallace-James). The observations of Lord Robson, in delivering the opinion of the Privy Council in Khoo Sit Hoh v. Lim Thean Tong, precisely describe the position in this case:-

"Their Lordships' Board are therefore called upon, as were also the Court of Appeal, to express an opinion on the credibility of conflicting witnesses whom they have not seen, heard, or questioned. In coming to a conclusion on such an issue their Lordships must of necessity be greatly influenced by the opinion of the learned trial Judge, whose judgment is itself under review. He sees the demeanour of the witnesses, and can estimate their intelligence, position, and character in a way not open to the Courts who deal with later stages of the case. Moreover, in cases like the present, where those Courts have only his note of the evidence to work upon, there are many points which, owing to the brevity of the note, may appear to have been imperfectly or ambiguously dealt with in the evidence, and yet were elucidated to the Judge's satisfaction at the trial, either by his own questions or by the explanations of counsel given in presence of the parties. Of course, it may be that in deciding between witnesses he has clearly failed on some point to take account of particular circumstances or probabilities material to an estimate of the evidence, or has given credence to testimony, perhaps plausibly put forward, which turns out on more careful analysis to be substantially inconsistent with itself, or with indisputable fact, but except in rare cases of that character, cases which are susceptible of being dealt with wholly by argument, a Court of appeal will hesitate long before it disturbs the findings of a trial Judge based on verbal testimony."

Upon the view which in common with the learned primary Judge I accept, the determining facts are very short and the decision of the case depends entirely upon questions of law. The respondent, Alfred Clarke, in 1919 carried on a business of a cordial manufacturer under the name of the Bux Brewing Company, but consistently allowed himself to be seduced by the temptation of putting small sums, derived by the sale of cordials, at hazard on the Stock Exchange. Until 1919 he appears to have met with little but disaster. In 1918 some persons of a like tendency whom he appears to have known associated themselves in an adventure the purpose of which was to win tin in the far distant Malay Peninsula. They registered a company under the no-liability provisions of Part II. of the Victorian Companies Act 1915, which is devoted to mining companies, and called the company the Badak Mining Syndicate No Liability. The respondent took up 2 fully paid up shares in this company the capital of which was divided into 100 shares of £10 each. Two persons, one named Williamson and one named Scarborough, appear to have received or become possessed of promoters' shares. Shortly after these shares were allotted they gave 2 of them to the respondent. They did so by handing him the scrip for each such share, which presumably was, like most other scrip in mining companies, endorsed in blank by the person to whom it was issued. It was treated by Williamson, Scarborough and the respondent, as it universally always is, as passing by delivery. At this juncture, of the numerous family of the respondent, which consisted of eight children and a wife, the three eldest sons were working with their father in his cordial factory, which seems to have been situated near his house. On the respondent's return home with the two gift shares, being desirous of giving them to his sons, one each to A. S. Clarke and L. V. Clarke (the two sons in whom his confidence seems to have been greatest), he put the shares on his desk and said "Here you are, boys; I got these free, you can have one each." They accepted them of course. The scrip was put in the office safe, one key of which was held by the father and one key by one of the sons. A. S. Clarke was subsequently registered in the register of the company as holder of 2 shares by reason of this gift. A point was made that it was not clearly established by the respondent that the registration was in respect of the 2 shares the scrip for which was physically given in the manner stated. These shares in respect of which A. S. Clarke was registered are numbered 77 and 78 and, as a matter of conjecture, it seems probable that they were the same. The sufficient answer is that after the lapse of eight years he can hardly be expected to prove with precision the indentity of the shares with the scrip. Moreover, in a community where mining shares in a company are treated as bearer securities the failure on the part of A. S. and L. V. Clarke to insist when it came to registration upon the identity of their own shares, when all shares were of equal value and only differed in the identifying number on the face of the scrip, could scarcely deprive them of the interest which the father sought to bestow on the sons. In my opinion the delivery of the scrip amounted to a gift. Before registration the sons were entitled both at law and in equity to procure by legal remedies, if necessary, the registration of the shares. As Isaacs J. in Anning v. Anning says:-

"The intention of the donor must have been perfectly effectuated so far as the nature of his property admits. ... On the other hand, if the donor has carried out his intention so far as the nature of the property will allow, equity will then exercise its jurisdiction to assist the donee in getting in the property. As was said by Chitty J. in In re Earl of Lucan; Hardinge v. Cobden: 'It is unnecessary to say in the case of a gift, the gift must be complete, and equity will not assist in completing an imperfect gift, though it is equally plain that equity will protect a donee who by a valid gift has obtained the title to the enjoyment of the thing that has been given.'"

The sons had no need to resort to legal remedies but procured registration, although for some reason L. V. Clarke preferred to have his share registered in the name of A. S. Clarke. At this stage it is undeniable that these shares belonged to the sons A. S. and L. V. Clarke. At a later date the company increased its capital and each shareholder became entitled to one more. Accordingly A. S. Clarke was registered for 2 more shares making 4 in all. This entailed a payment of £10 to the company, which the father paid on behalf of the sons. At a later stage the company again doubled its capital so that those sons became entitled to four additional shares. The father had been desirous of benefiting his wife and the remaining members of his family, and had already taken some steps to bestow Badak shares upon them. The father asked A. S. and L. V. Clarke if they would stand back in favour of the other members of the family and allow these 4 shares to be given to them. This they agreed to. This seems to have taken place in January or February 1919. In April 1919 another project which had for its object mining in the Malay Peninsula was started. A promoter of the Badak Company named Orton was in the Malay Peninsula and wrote to the Badak Company stating that there was a claim adjoining the Badak property which was good land and suggesting it should be acquired. He also wrote to Williamson and Scarborough to the same effect. The company had not the money or would not take up the land, and these letters were shown to the respondent. He suggested that Scarborough should be sent to see if Orton had the kind of property he said he had. He then spoke to A. S. and L. V. Clarke about the matter:-

"I had a conversation with my sons about it; that night I went home and spoke to A. S. and Leslie V. The conversation was about the letter that had been received from Orton stating that there was some good ground adjoining the Badak, and that it would be worth while sending someone across to take it up. They agreed to help to finance me to send Scarborough across at our own expense-just the three of us, I and my two sons-to acquire further territory, principally to see if he had the property he said he had. We had a conversation with Scarborough to see whether he would go over and make arrangements."

What then occurs is clearly shown in the following passage from A. S. Clarke's evidence:-

"Q. Was there anything else said while Scarborough was there? A. Only that he should get ready and get away. The next step was that just a few days after father came home and suggested a syndicate being formed, and he told me that he met Mr. Rogers, I think in Queen Street, and Dad told Mr. Rogers what he was doing and Mr. Rogers said 'Oh, well! I would like to stand in with you.' Father said 'I cannot do anything, I will have to ask the boys.' Father came home and told me that he saw Mr. Trembath, and Mr. Trembath wanted to form a syndicate and send Scarborough across. I was a bit peeved at the time, I said 'Why do they want to come in now? We decided to send him across and now they want to come in.' Father suggested that we should let them come in and form a syndicate, and Leslie and I both agreed that a syndicate should be formed and it was formed. Q. Whilst it was being formed, did your father and you have discussions as to what interest you should take? A. I said I wanted a share right off. He told me it was being put into a syndicate of sixteen shares, and I said 'I want one,' and L. V. said he wanted one. That was agreed to. Nothing was said at that time about paying for it, but within a month I wanted to fix up for that share, but father said 'No, leave it go and see how it gets along.' I did make a suggestion to pay for that within a few days."

This makes it plain that, the father and sons having tentatively agreed upon a joint adventure the profits or losses of which they were to share equally, the father and the sons afterwards agreed to become members of a wider syndicate in which each son was to have an interest expressed as one share. The syndicate was formed as a common law partnership or unincorporated company, with its subscribed capital divided into 16 shares of £30 each of which £25 each was immediately paid up. The father and sons agreed that the father should stand in relation to the other syndicators as a shareholder for 3 shares but as between the sons and himself he was to subscribe in respect of one share for each of them. In point of fact he at the same time told his wife and the other members of the family that he would take one share for them. He took up 4 shares but, owing to some misunderstanding, felt himself obliged to part with his own to two persons named Rees and Taylor. He was thus left holding 3 shares, 2 of which he had taken up under a definite arrangement with his sons A. S. and L. V. Clarke and on their behalf and 1 of which he at least believed he held for his wife and the other members of his family. The Commissioner contends that it was never intended that the sons should pay the father the amounts paid or payable upon their shares and much time was expended in discussing whether they ever did so. There is no doubt that the father and the sons entered into the transaction as a business venture on a business basis. It appears from a book of account, which happened to survive the subsequent discontinuance of his brewing business and the vicissitudes of the exhaustive inquiries of the Commissioner and the investigation of other authorities, that these sons, like other members of his family, had definite business relations with the father as the result of which they sometimes stood as his creditors and sometimes as his debtors in relation to the business. I have no doubt that the father and his sons A. S. and L. V. Clarke regarded themselves as in definite business or legal relations under which the father was bound to treat himself as holding 2 shares in the syndicate 1 for each of them. But, as would be not unusual where father and sons had a running account between them, the father waived aside actual payment, as the learned primary Judge points out in the passage already quoted from his judgment. In the numerous subsequent transactions, in what must have become to them very high finance, it does not seem at all improbable that both father and sons had a very misty idea of precisely when and precisely how the small sum of £25 (with an additional call of £5) was debited to each son in their transactions with the father. The varying strength of their beliefs and misgivings in the numerous statements they have had to make rather betokens candour than a concerted story. The learned primary Judge's view on this transaction seems to be very sensible and right and to display no unwonted credulity on his part, but merely a knowledge of human beings and their ways. The legal result of this transaction seems clearly to be that the father held what contractual right he possessed in the syndicate as a fiduciary in relation to 2 shares for his two sons. The syndicate at all material times was possessed of paid up capital, and the suggestion that the father had no proprietary or legal right which he could hold for the sons seems to lack foundation. It is true that the syndicate had no mine in the Malay States but merely a claim for one or what might be called a spes accessionis in relation thereto, but it was a definite partnership adventure, and why an interest in such an adventure cannot be the subject of equitable relations I am unable to understand. As a result of the transaction thus discussed, the sons were, in my opinion, entitled to 4 Badak shares and to a beneficial interest in 2 shares in the Bux Syndicate.

In the year ending 30th June 1920 the sons sold 2 Badak shares for £297. During the same period the Bux Syndicate interests and prospects were conceived to be so valuable that a no-liability company was floated to take them over and in respect of each syndicate share in question 54 fully paid shares in the new company were issued free and 54 contributory shares upon a payment of £5 per share. Each son thus became entitled to 108 shares in the new company on payment of £270. All the shares in the company were issued in the name of a nominee and the scrip was endorsed by him. The father paid the £540 required for and on behalf of his two sons. The company was registered on 17th February 1920, but there was some delay in the issue of the scrip. According to the father, the two sons and Trembath, a sharebroker, the last-named sought to buy on behalf of his clients some of the Buxshares about to be issued. The father told him that perhaps his sons would sell, and they in fact instructed him to sell a number. 162 shares were sold by this broker between 17th February and 18th March 1920 for a gross sum of £14,937 10s.; 23 more were sold by a broker named Archer for £2,159. These sums for the 2 Badak shares, 162 Bux and the 23 Bux were all actually received by the two sons either in cheques from the brokers or in Commonwealth War Bonds purchased by the brokers. The cheques were paid into the bank account of L. V. Clarke, who drew a cheque on 23rd March for £540 by which he paid his father the two sums of £270 which the father had paid for him and his brother respectively for the 54 contributory shares. The balance he divided later with his brother A. S. Clarke. The reason for L. V. Clarke handling the money seems to be found in the fact that A. S. Clarke had had the misfortune on 17th February to kill a man in a motor accident and was to be tried for manslaughter. The total sum thus received by the sons from the proceeds of shares sold during the period in question was thus £17,393 10s. Whether these profits were income or not, they were the profits of the sons derived by their own dealings with their own property. The Commissioner, after the fullest possible investigation, took this view and assessed A. S. and L. V. Clarke in May 1923 for income tax upon their respective shares in this amount less proper deductions. The sons seem to have been advised that the profits were not income, and appealed against this assessment. The question upon the appeal was whether the admitted profit, admittedly derived by them, was in its character income or not. The facts relating to the question whether the profits were theirs or their father's were unnecessarily imperfectly gone into. Upon the slight materials before the learned Judge who heard the appeal of A. S. Clarke he seems to have got the impression that the sons might have been put forward as taxpayers in order to prevent the amount so derived being treated as the father's income, whether to avoid aggregation or tax altogether is not clear. The Commissioner was encouraged by the expression of the learned Judge's views or suspicions to depart from the view which he had formed on much fuller and, indeed, very complete material, and to amend the father's assessment to include the whole of this sum together with a further sum of £23,379 3s. 2d., less proper deductions, which he had before attributed to the mother and other members of the family. He accordingly cancelled the assessments of the two sons which were under appeal. The sum of £23,379 3s. 2d. which he had so attributed to the mother and various members of the family consisted of £11,936 4s., proceeds of 9 shares in the Badak No Liability Company; of £2,433 4s. 2d., proceeds of 5,000 shares in a larger Badak company into which the former Badak company was reconstructed at a later date, representing 3 shares in the original company with 500 shares in the new company added or thrown in; and of £9,009 15s., the proceeds of 100 shares in the Bux No Liability Company into which the Bux Syndicate was floated. The whole of these sums, with the exception of £1,064, were actually received by the wife and the various members of the family either in the form of brokers' cheques or war bonds. It is clear that the respondent never enjoyed any part of this money at any time. It is true that some part of the money which was invested in war bonds passed through his bank account. It is true that for some time the war bonds remained in the office safe together with the bonds belonging to A. S. and L. V. Clarke and, for all that appears, together with securities belonging to the father. But it is also true that each member of the family ultimately placed war bonds of the face value of £2,000 in his or her bank for safe-keeping and the mother placed war bonds of the face value of £4,000 in her bank, and that in the interim each member received the interest upon the war bonds, and there cannot be any reasonable doubt that from the time the war bonds were purchased they belonged to and were enjoyed by the mother or child, as the case may be, who afterwards placed them in her or his bank. The proceeds of the 100 Bux Company shares represented the selling price of 100 out of 108 shares in that company which were taken up in respect of the 1 share in the original Bux Syndicate which the father had avowedly acquired in that syndicate for the benefit of his wife and his family. He told his wife he took it for her and the family when he acquired it. He told Trembath, the broker, who was secretary of the syndicate, and Murchie, the secretary of the company. He avowedly took up 108 shares for his wife and family, and he told them at the time that he was about to do so. The scrip for the 108 shares was intended to be issued in the name of Murchie as a nominee and endorsed by him to bearer. The father did not acquire any legal interest in respect of the 108 shares of his own as a shareholder on the register of the company. When he took up the shares in the original syndicate he intended to stand in relation to the other syndicate as a syndicator, but he declared that the beneficial interest was in his wife and family. It is true that he did not intend them to give any consideration, although it is probable he intended to deduct the £25 paid, and any further payments, from the price the share realized when it was sold. But, as he intended to hold the legal right himself but intended that the beneficial right should be in others and declared this intention, he seems to me to have constituted himself a trustee for his wife and family. He said he intended to reserve for himself a power or right of apportioning the profits derived from the share among the wife and the children; and, although this was done without objection, he did not communicate this intention at the beginning, and in strictness he constituted himself a trustee for the wife and family in equal shares. Be this as it may, he does not appear to me to have been entitled to the profits derived from the sale of the 100 Bux Company's shares. He was free neither according to the principles of honesty nor the strict rules of equity to appropriate the proceeds to his own use. The proceeds of the 12 Badak shares, 9 of which were sold in their original form and 3 in the form of property into which they were converted, namely, 4,500 in the reconstructed Badak Company, were, in my opinion, in the same position. These 12 shares belonged to the father neither in law nor in equity. In 1918 he informed his wife that he had acquired 2 Badak shares for her. He narrates the circumstances in which he acquired them, and it would appear that the scrip which represented them was bearer scrip at the time, the registered shareholder being a stranger. In May 1919, 2 shares were accordingly registered in the name of Mrs. Clarke. These shares had been doubled when the capital was doubled, and she was entitled therefore to 4. 2 were, however, registered in the name of her son Edgar and when the capital was again doubled Edgar and she together became entitled to 4 more, 8 in all. A. S. and L. V. Clarke agreed to stand back in respect of the 4 to which they became entitled, but 2 of these were registered in A. S. Clarke's name, the remaining 2 were registered in the name of some nominee. In the meantime the father did make it clear that he did not intend his wife to have the sole interest in these shares but that they were held for the family other than A. S. and L. V. Clarke, and accordingly 4 were registered in Edgar's name and 2 remained in A. S. Clarke's name. In these circumstances the respondent clearly did not have the legal interest, and in my opinion he did not have the equitable interest in these 12 shares and the proceeds of them formed no part of his property and could not be his income. From the proceeds of the Badak and Bux shares sold for the wife and family he in fact deducted £1,064 or thereabouts, of which £800 represented what he had expended in acquiring these interests, and the remaining sum of £200 odd seems to have been unaccounted for in the division amongst the children because, apparently, the division was accomplished by giving brokers' cheques or bonds.

It was contended on behalf of the Commissioner that the activities carried on by the father with the help of the sons in the realization of the shares amounted to the carrying on of a business so that the net proceeds of the shares were income or, in that or some other way, the activities were so frequent and repeated as to render the proceeds income. It was said that activities carried on systematically and on an organized scale, although directed to realization of stock and shares, constituted a business or avocation or pursuit the profits derived from which were income. But the expressions "systematic" and "organized" are somewhat elastic and, unless it was quite kept in view that they meant something more than repetition, frequency or habit, they were misleading. The difference was well brought out in the judgment of Rowlatt J. in Graham v. Green by the illustration of the bookmaker and his client. It was nothing to the point that the bookmaker attended at the racecourse with equal frequency as the client. The bookmaker had his system organized in a way that made his business consist not in the multiplicity but in the mutual relation of his bets and in the continuous effort to maintain a profitable return therefrom. The speculations of men who dabble in stocks and shares, however often repeated, depend upon no such continuous effort. The continuous optimism of the respondent for very many years led him to hazard small sums of money in speculation often enough to justify him in calling it a hobby. Every speculation was isolated from the others. There was no co-ordination or system. The speculations in Badak and in Bux in their inception resembled these, although their result was so different as to justify the optimism which the respondent continued to show over so many years in the others. Moreover, there seems to be much reason in the suggestion of Mann J. that, if Clarke thought he had given the shares from which profits proceeded to his sons and family, he could scarcely be considered as carrying on an organized business for his own profit in selling them. Except for the extraordinary amount of profits derived from these ventures, the position of Clarke and his family is not dissimilar from that of the ordinary speculator who becomes a member of a syndicate and takes part in the conversion of the syndicate into a company or otherwise speculates on the Stock Exchange. Both in New South Wales and Victoria such persons have not been considered as liable to be taxed on their profits or entitled to deduct their losses under the Income Tax Acts (Foreman v. Commissioners of Taxation; In re The Income Tax Acts (No. 4)). For these reasons the profits in question were not derived by the respondent Clarke nor were they income.

This appeal was from an amendment of an assessment made in 1921. This amendment was made pursuant to sec. 2 of the Act 1922-1925, which keeps alive the repealed Acts 1915-1921 for certain purposes. They were kept alive subject, however, to the proviso that "no alteration or addition shall be made in or to any assessment made under any such Act after the expiration of three years from the date when the tax payable on the assessment was originally due and payable, unless the Commissioner has reason to believe that there has been an avoidance of tax owing to fraud or attempted evasion." This proviso was inserted by Act No. 28 of 1925 and is evidently based upon the proviso to sec. 37 (1) of the 1922-1925 Act which is, however, confined to assessments made for the financial year commencing 1st July 1922 and for the succeeding financial years (sec. 32 (2)). The question therefore arises whether the Commissioner had "reason to believe that there had been an avoidance of tax owing to fraud or attempted evasion." The Commissioner attempted to establish that he had reason to believe that the amended assessment, made 11th May 1923, by which he assessed the father in respect only of £7,499, was induced by fraud or attempted evasion. It may be doubted whether on the true construction of the second proviso to sec. 2 and also of the second proviso to sec. 37 (1) the fraud or attempted evasion there referred to must not be in connection with the assessment itself and not subject to additions or alterations thereto. The scheme of the legislation appears to be to allow the Commissioner as much time to make the assessment as he desires but, when he has made it, to give him a period of three years to rectify mistakes he has made in it "to insure its completeness and accuracy," unless those mistakes, namely, its lack of "completeness and accuracy," are attributable to the fraud or attempted evasion of the taxpayer. Where the proviso says "unless the Commissioner has reason to believe that there has been an avoidance of tax owing to fraud or attempted evasion," some period is referred to by the words "has been," and the fraud or attempted evasion must have been in relation to some act or assessment of the Commissioner, and the structure of the sentence strongly suggests that the process of assessment is the act referred to and the words "has been" relate to the time when that takes place. However this may be, the Commissioner directed his case to showing that the fraud or attempted evasion which he had reason to believe existed took place at a much later date. It was not suggested that he had reason to believe that in 1921 there was fraud or attempted evasion. It may be that the Legislature intended the Commissioner to express to the taxpayer in the assessment or in connection with it his belief in the fraud or attempted evasion, but this step the Commissioner did not take. The notice of amended assessment bears no trace of any such belief. After the taxpayer had lodged objections, including the objection that the period of three years from the original assessment had expired, the Commissioner on 30th November 1926 wrote to the taxpayer claiming double tax on the ground of fraud or attempted evasion, and narrated that he had formed the belief in May 1923, and he says: "I have now ascertained that the said representation was not true and that the whole of the said profits were profits made by you, and, having reconsidered the matter, I have determined that I have reason to believe that there has been an avoidance of tax on your part owing to fraud or attempted evasion within the meaning of section 2 of the Income Tax Assessment Act 1921-1925."

The Commissioner was called as a witness and described the formation of his belief, which he attributed to the time when the amendment appealed from was made in April 1926. An appeal of the son A. S. Clarke had been heard before a Justice of the High Court, and the son and father had given some account of their mutual relations as to which my brother Starke had during the progress of the case expressed some incredulity. The Commissioner did not profess to be influenced by these expressions but quite properly directed his own mind, as he says, to the question. He looked at two cases for opinion which had been submitted to counsel upon the question whether the profits in respect of which he had separately assessed the father, sons and members of the family bore the character of income. He found in them statements which he considered inconsistent with the evidence given by them before Starke J., and he appears to have recalled that according to the reports of his officers some statements had been made to him which he thought were not borne out by the evidence. He overlooked the fact that the cases for opinion had been submitted to counsel and afterwards handed to him after the amended assessment had been made in May 1923, and if these cases did contain misstatements they neither were designed nor operated to induce him to do what he had already done. The reports of his officers were put in evidence, but it is not clear from the Commissioner's evidence whether he studied them or relied upon his memory or some other account of them. A scrutiny of these reports and a comparison of the evidence do not afford ground for thinking that any fraud or attempted evasion had been practised; nor does the Commissioner say that, had it not been for the cases for opinion which he thought preceded the amendment to the assessment, he would have arrived at the conclusion that there was fraud or attempted evasion.

In these circumstances the question is: Did the Commissioner have "reason to believe"? The answer seems to depend upon the meaning and effect of that expression. In Moreau v. Federal Commissioner of Taxation my brother Isaacs discussed it and has given a very wide meaning to it. Mann J. considered himself bound by that decision, and, applying it, was constrained to hold that the Commissioner had reason to believe. It seems plain from his judgment that if he had been free to express his own view he would have held otherwise. The expression "reason to believe" is one frequently used in the English language. In the Oxford Dictionary "reason" is defined as "a fact or circumstance forming or alleged as forming a ground or motive leading, or sufficient to lead, a person to adopt or reject some course of action or procedure, belief, & c." And Mill's Logic I. iii., sec. 7, is cited: "Should we not have as much reason to believe that it still existed as we now have." Applying this standard, the materials do not of themselves suggest to my mind any reason to believe, and the Commissioner's reason to believe consists merely of an irrational error due to forgetfulness or a failure to advert to the real sequence and significance of those materials. The process of calling the Commissioner as a witness as to his secret beliefs and reasons unexpressed and not communicated to the taxpayer seems a curious proceeding; and I cannot help thinking that the Legislature intended that the assessment itself should state what reason the Commissioner had for his belief, leaving the taxpayer to attack its sufficiency if he thought he could do so.

It was suggested that, if the Court were to hold that the gifts and trusts were established, it should under sec. 51A (5) amend the assessment in some fashion so as to make the tax exigible in respect of the gifts and trusts. Such a course is not warranted by the Act. The assessment made by the Commissioner was directed against the respondent in his individual capacity. The donees and the cestuis que trust were not parties to the assessment and could not lodge an objection to it (sec. 50) and were not parties to or heard on the appeal (sec. 51A). Moreover, the Act makes special provision for the case of trustees (sec. 31). In an ordinary case these gifts and trusts would not escape taxation but would be assessed in the manner prescribed by the Act. Whether the vagaries indulged in by the Department in the course of this somewhat tortuous series of assessments now prevent this being done, I refrain from saying. It is another story. That matter and the proper parties to it are not before us.

Before parting with this case I must deal with an argument insisted upon by counsel for the Commissioner, lest it be thought it was overlooked. It was urged that the Court would not lend its aid to the respondent because it was alleged he had been guilty of fraud or illegality in connection with the Badak and Bux shares (Scott v. Brown, Doering, McNab & Co.). "No man," said Lord Mansfield, "shall set up his own iniquity as a defence, any more than as a cause of action" (Montefiori v. Montefiori). But this argument appears to me to involve some confusion of thought. The fraud or illegality, if there was any, was concerned with the acquisition of the interests in the two companies mentioned. The constitution or validity of the gifts and trusts in favour of the respondent's family-the only matter in issue in this case-was surely an innocent and meritorious transaction. The facta probanda relied upon to establish the gifts and trusts in question are unconnected with the alleged fraud or illegality and the well-known principle has no application.

In my opinion the appeal should be dismissed with costs.