Case P41

Judges:
MB Hogan Ch
P Gerber M
GW Beck M

Court:
No. 3 Board of Review

Judgment date: 24 May 1982.

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M.B. Hogan (Chairman) and Dr. P. Gerber (Member)

Dr. Beck has fully set out the facts. We will therefore limit ourselves to those facts which we find material in reaching our decision.

2. The taxpayer, an engineer/inventor, discovered and patented an improved device for an industrial process (henceforth referred to as ``the invention'') and entered into a licence agreement with an industrial firm (henceforth referred to as ``the company'') pursuant to which the taxpayer granted to the company, inter alia, an exclusive licence to use, manufacture and sell the invention. In time, a disagreement arose between the parties, resulting in taxpayer instituting legal proceedings. The company counterclaimed. Neither the Statement of Claim nor the Counterclaim were tendered in evidence. However, the claim and counterclaim were settled and the Deed of Settlement was included in the Chairman's file. From this we are able to reconstruct that the taxpayer asserted inter alia,

• (i) that the defendant had committed certain breaches of the licence agreement (which the defendant denied);
• (ii) that the defendant was indebted to the

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  ATC 193

  taxpayer pursuant to the agreement for services performed by him (which the defendant denied);
• (iii) royalties (as to which the parties were in disagreement with respect to quantum).

The defendant asserted in its counterclaim (inter alia) that the taxpayer's patents were invalid.

3. In addition, there appeared to have been a dispute as to whether the agreement had, in fact, been terminated at some earlier point in time. After some interlocutory proceedings, the parties reached a compromise which resulted in the plaintiff/taxpayer accepting an amount of $5,540 ``in full satisfaction of all rights under the said licence agreement''. It was part of the compromise that the taxpayer would grant the company a new licence agreement with respect to the same invention, but on different terms. The defendant, in turn, agreed that ``it will not hereafter either in proceedings or otherwise during the terms of this (new) agreement assert that the said patents are not valid patents''. Each party agreed to pay its own costs, the plaintiff agreeing not to enforce costs awarded in his favour in the interlocutory proceedings.

4. During the hearing, taxpayer sought to dissect the global sum of $5,540 in terms of ``work done'', ``royalties'', and ``the way I had construed the agreement'' (p. 27 tr.). Bearing in mind that we are here dealing with a claim and counterclaim, both of which were settled, we find it impossible to conclude on the evidence that the sum of $5,540, or any quantifiable amount thereof had a distinct revenue character. What was received by the taxpayer was a lump sum in settlement of all claims and counterclaims, some of which are clearly of a capital nature. Indeed, it seems to us that the whole amount is one of capital, being in consideration for giving up the cause of action sued upon - to use a hackneyed fiscal term - the payment was of the ``once and for all'' kind and bears none of the characteristics of income; cf.
Allsop v. F.C. of T. (1965) 113 C.L.R. 341 , per Barwick C.J. and Taylor J. at p. 351. The expenditure thus being an affair of capital, even if it be an incident of a business of engineer/inventor carried on by the taxpayer as found by our colleague, Dr. Beck, it is nonetheless excluded from deduction pursuant to sec. 51(1) by reason of it being an expenditure of a capital nature. Subject only to the subsequent paragraph, it follows that the claim for legal expenses incurred in the two years now before the Board must fail.

5. The Commissioner allowed an amount of $50 as ``legal expenses'' pursuant to sec. 64A in the 1978 tax year but denied a similar deduction in the following year. The effect of sec. 64A is to permit a deduction not exceeding $50 in respect of certain legal expenses which would not otherwise be deductible under sec. 51(1). It seems to us that sec. 64A is a provision complementary to sec. 51(1) in the sense that certain specified legal expenses (up to $50) may nonetheless be allowable notwithstanding that they may be of a capital nature. At the hearing, the Commissioner's representative very properly did not press the issue that the amount of $50 should be denied as a deduction in the 1979 tax year. In our view, the taxpayer is clearly entitled to the deduction in that year.

6. Subject to the amendment contained in the preceding paragraph, we would otherwise confirm the Commissioner's decision on the objections.