Commissioner of Taxes (South Australia) v Executor Trustee and Agency Co of South Australia Ltd
63 CLR 108(Judgment by: Latham C.J.) Court:
Judges:
Latham CJRich J
Dixon J
McTiernan J
Subject References:
Taxation and revenue
Income tax
Method of assessment
Alteration of mode of assessment following death of taxpayer
Suggested reading:
Taxation Act 1927 (SA) No 1787, ss 42, 43, 81, 84, 87 Hearing date: 30 September 1938; 3 October 1938 - ADELAIDE
Judgment date: 23 December 1938
MELBOURNE
Judgment by:
Latham C.J.
This appeal raises some important questions under the South Australia Taxation Acts 1927-1933. Dr. Hubert Cecil Carden was a medical practitioner residing and practising at Kadina in the State of South Australia. He died on the 15th November 1935. The respondent company is the executor of his will. In his returns for income tax purposes Dr. Carden, up to June 1929, included outstanding debts which had become due to him during the year. In his return for the year ending 30th June 1930 and for subsequent years he returned as his income only moneys actually received in the course of the relevant year, that is, returns were made upon a cash basis as distinct from an earnings basis. This was done with the consent of the Commissioner of Taxes and, indeed, was apparently brought about by an alteration in the terms of the printed form which is provided for the use of taxpayers in making their returns. After the death of Dr. Carden on the 15th November 1935, the executor lodged a return under s. 42 of the Acts relating to the period from 1st July 1935 to 15th November 1935. In this return the executor followed the recent practice of the testator and returned only the cash received during the period. A claim was made for a deduction of PD248 9s. as expenses incurred by the taxpayer in the production of the income.
On 24th August 1936 the commissioner assessed the executor and included in the taxable income a sum of PD3,274 as the value of book debts which were due but had not been paid. Upon further examination of the facts the commissioner agreed that the sum of PD3,274 should be reduced to PD2,119 by reason of the facts that tax had been paid before 1st July 1929 in respect of certain of the debts and that others of the debts had proved to be bad. The executor appealed from the assessment and the Local Court of Adelaide stated a case in which the following questions were asked:
"(1) Was the commissioner entitled to include any, and if so, what sum in respect of the book debts?
(2) If no portion of the book debts should be included in the assessment, should any, and if so, what, adjustment be made in respect of the deduction of PD248 9s. claimed by the appellant as the expenses incurred in the production of the gross income from the medical practice?"
The Full Court of the Supreme Court determined the case in favour of the executor, answering the questions in the following manner:
"(1) The facts stated in the case do not disclose that (the deceased) had escaped full taxation in his lifetime by reason of not having made full complete and accurate returns and in default of a finding by the Local Court ... to that effect the respondent was not entitled to include ... anything in respect of the book debts earned on or before the 30th June 1935.
(2) No adjustment should be made."
Special leave was given to the commissioner to appeal to this court from the judgment of the Full Court.
In the assessment which was the subject matter of the case stated the commissioner had included the whole amount of outstanding book debts in an assessment for the period 1st July to 15th November 1935. Upon the application for leave to appeal the question was raised whether, if the commissioner were entitled to include book debts at all, he ought not to include them as income in the year in which they respectively accrued to the taxpayer rather than include them all in a single assessment for the latest period. A further question might then arise as to whether the commissioner was entitled to re-open any and which past assessments. In order that these questions might also be determined (if necessary) by the court, the commissioner issued amended assessments in respect of the years ending 30th June 1934 and 30th June 1935, and included in these assessments as part of the taxable income of the deceased an estimate by the executor of the amount which will ultimately be realized from the book debts which became due to the deceased in each of those years respectively. These assessments were made upon the company as executor of the estate of H. C. Carden deceased. The company appealed and, upon the appeals coming on for hearing, the Local Court consolidated them and stated a case for the opinion of the Supreme Court in which the following questions were asked:
"(1) Was the commissioner entitled to include in the amended assessments any, and if so, what sum in respect of the book debts referred to in par. 8 hereof?
(2) Was the commissioner entitled to make an amended assessment in respect of either of the said years?"
The Full Court, following the principles which it had applied in deciding the former case, answered the questions in favour of the company. Special leave to appeal from this decision has also been granted to the commissioner.
The Full Court based its judgment in the first place upon the general conception of income as something that comes in and accordingly, prima facie at least, as something that is actually received. This question must be considered in the light of the definition section and other specific provisions of the South Australian statute. In the second place, the Full Court took the view that, in the case of a profession, profits could be ascertained by a simple cash account, with no allowance for book debts, and that (as I read the reasons for judgment) the taxpayer was entitled at his option as a matter of right to adopt this method as the basis of his returns rather than a method which took accrued debts into account. The court found itself unable to take the view that the latter method was "compulsory" as a "method of computation in point of law." The consideration of this question also depends upon the precise terms of the statute. The court accordingly also held that the omission of the book debts did not make the returns other than "full complete and accurate," with the result that s. 43 of the Act was not applicable. That section provides that when a deceased person has escaped full taxation in his lifetime by reason of not having made full complete and accurate returns, the commissioner may exercise certain powers with respect to his personal representative. But as to the last period (July-November 1935), the court held that the commissioner was not bound to accept returns on a cash receipts basis and could, if he chose, insist on the inclusion of book debts which accrued during that period.
I propose first to inquire whether, if Dr. Carden had still been alive, it would have been open to the commissioner to insist upon inclusion in his returns of the value of book debts which fell due during the year in respect of which the income was derived and in relation to which a return was being made. If this question should be answered in the affirmative, it will then be necessary to inquire whether the commissioner could properly include the value of such debts in an assessment made after the death of the taxpayer and, if so, upon what basis-whether by including the value of all the book debts in one single assessment for the last period or by including them in amended assessments of the earlier years in which the debts fell due. If the latter procedure should be applicable, a question will then arise as to how far back the commissioner can go.
There has not been any express decision in Australia or in England with respect to the basis upon which professional men should return their income for income tax purposes. There are, however, English and Scotch decisions upon the meaning of the provisions under which both traders and professional men are taxed. If, as in my opinion is the case, these provisions are the same in the relevant respects as the South Australian provisions, the principles stated in these decisions should assist in the solution of the problem which is before the court.
In the case of traders, where tax is imposed upon the profits of a trade, profits are calculated both in Australia and in England on an earnings basis; that is to say, the trade debts which fall due to the taxpayer during the year are credited and allowance is made for bad debts. But in the case of professional men it has been a common, though not a universal, practice both in Australia and in England for the taxation authorities to accept returns made on a cash basis. Where this is done only cash payments received in the year are returned and taxed, and no attention is paid to book debts which are not paid to the taxpayer during the year (Konstam, The Law of Income Tax, 6th ed., p. 119).
Although the returns of professional men have often been accepted when prepared on a cash basis, it has not yet been determined by any court that there is a right to be assessed upon that basis: See Halsbury's Laws of England, 2nd ed., vol. 17, p. 175 and p. 119.
Both in South Australia and in England the income of professional men is taxed under and by reason of provisions expressed in the same terms as those which govern the case of traders.
In the case of a trader it is well established that he must take into account book debts owed to him as part of his income, at least where those book debts fall due during the year in respect of which he is making his return. An allowance may be made under statutory provisions for bad or doubtful debts, but, subject to such an allowance, the book debts must be returned as part of a trader's income. These rules depend in England upon the fact that traders are taxed, under the Income Tax Act 1918, Schedule D, clause 1 (a (ii),
"in respect of the actual profits or gains arising or accruing to any person residing in the United Kingdom from any trade, profession, employment, or vocation, whether the same be respectively carried on in the United Kingdom or elsewhere."
There is a similar provision dealing with non-residents in Schedule D, clause 1 (a) (iii). It will be observed that profits or gains from a profession are taxed under the same provisions as those which are appropriate in the case of a trade.
Traders are taxed under Case I. in Schedule D: "Tax in respect of any trade not contained in any other schedule." Professional men are taxed under Case II.: "Tax in respect of any profession, employment, or vocation not contained in any other schedule."
The rules applicable to Schedule D provide, in the rule applicable to Case I. (that is, as to traders) that "the tax ... shall be computed on the full amount of the balance of the profits or gains upon a fair and just average," etc
The rule applicable to Case II. (which includes professional men) provides that "the tax ... shall be computed on the full amount of the balance of profits, gains and emoluments of the professions, employments or vocations upon a fair and just average" etc
Rule 3 (i) of the rules applicable to Cases I. and II. provides that "in computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of any debts, except bad debts proved to be such to the satisfaction of the commissioners and doubtful debts to the extent that they are respectively estimated to be bad."
The rule that traders must include book debts owing to them but still unpaid depends upon the taxation of their income under the words "profits and gains" and upon the terms of rule 3 (i), which implies that book debts must be included in the return (Halsbury's Laws of England, 2nd ed., vol. 17, p. 119, note i). The ascertainment of profits and gains necessarily involves an account with credit and debit items: See Usher's Wiltshire Brewery Ltd v Bruce [F1] , at p. 468. It is impossible to ascertain the profits of any business or occupation without taking such an account.
Where tax is levied upon a definite sum which is ascertainable without the deduction of any amount, as, for example, upon interest of money under the Income Tax Act 1918, Schedule D, clause 1 (b), no such account need be taken. In such a case a specific sum of money is subject to the tax. Thus it has been held that such a sum does not form part of the income of the taxpayer until it has been actually received. But trade debts which have accrued due in the relevant year but which have not been paid must be included for the purpose of ascertaining whether or not the business has earned a profit for the year, just as stock in trade at the beginning and end of the year must be taken into account for the same purpose. But only trade debts need be included. Other debts are irrelevant for the purpose of ascertaining the profits of a trade: See Halsbury's Laws of England, 2nd ed., vol. 17, p. 85.
The principle that, when it is necessary to ascertain the profits of any enterprise, it is impossible to confine consideration to a cash account of receipts and expenditure was clearly stated by Lord Clyde in Dailuaine-Talisker Distilleries Ltd v Commissioners of Inland Revenue [F2] :
"It is elementary that a profit and loss account is not an account of receipts and expenditure in cash only; its purpose is to show how the business stands, for better or for worse, on the operations of the year. Thus, if goods have been sold or delivered to a customer within the year, the sum due by the customer is credited to the business and debited to the customer and enters the profit and loss account at the end of the year, whether payment in cash (or otherwise) has been received within the year or not."
In the same case Lord Sands said [F3] :
"At the outset of the argument the question was put to the learned counsel for the appellants:
If a trader has sold goods in the course of a year of charge but has not received payment of the price at the expiry of that year, does not the amount of the price fall to be taken into account in estimating the profits of the year?' The answer to that question was in the affirmative. In the present case we are not dealing with the price of goods but with payment for services rendered, but, as it appears to me, the same principle must apply. If there is a book debt for such services rendered during the year standing in the books of the business, this falls to be taken into account in estimating the profits of the year. In neither case does it matter whether non-payment is the result of default or of agreement to postpone payment. The book debt comes into account in estimating profits of the year. The debt has accrued, and in estimating profits which have accrued the debt must be taken into account."
If these principles are sound, they determine the answer to the first question which arises in the present appeal, unless there is a distinction between the South-Australian statute and the statute which was being construed in the case to which I have referred.
The provisions of the English statute under which traders are taxed require an ascertainment of the balance of the profit or gains of the trade. In the case of a profession the words are "the balance of the profits, gains and emoluments of the profession." The rule permitting the deduction of bad debts and allowances for doubtful debts applies to both trades and professions. If these features are present in the South Australian legislation then it appears to me that the decisions upon the English Income Tax Act which establish that a trader must bring his book debts into account should be applied also to the South Australian Act. Further, if this be the case, as the same words are used for the purpose of taxing the income of professional men, the same result would follow with respect to professional men. I proceed, therefore, to examine the precise provisions of the South Australian statute.
The Taxation Acts 1927-1933, s. 4, provide that " 'income derived from personal exertion' includes-(a) every kind of profit and every kind of gain, whether arising in the course of business or otherwise howsoever, except gifts, legacies, and bequests; and (b) all salaries, wages, allowances, pensions, or stipends; with the exception of 'income consisting of the produce of property.' " Thus we find that income derived from personal exertion includes profits and gains, and accordingly one of the important features of the English legislation is found in the South Australian statute. This provision makes it necessary to take an account in order to ascertain not only the profits or gains of a business but also any other profit or gain arising from personal exertion.
Section 18 imposes a tax on all incomes arising or accruing in or derived from the State and on income received by any person ordinarily resident in the State from dividends from any company with certain exceptions. (The word "received" was altered to "derived" by s. 8 of Act 2233 (1935) but that amendment is not material for the purpose of these cases.) Section 18 is directed towards the definition of the territorial origin of the income and not to the question of the time at which moneys due to a taxpayer are deemed to form part of his income. But the section does show that in the case of the dividends mentioned the income must be received before it is taxable. This provision suggests that in the case of the other incomes mentioned in the same section as arising or accruing in or derived from the State, the element of receipt is not regarded as a necessary element in order to bring about an arising or accruing or derivation. A debt is incurred by the debtor when he becomes subject to an obligation to pay a sum certain in money to his creditor. The debt may be payable forthwith or at some future time. A debt accrues when it becomes due, whether it becomes due immediately or at a future time. When the debt is paid, then the creditor has received the debt, but the debt has accrued when it falls due even though it has not been received: Cf. Leigh v Inland Revenue Commissioners [F4] . This was a case of taxation of interest, and, as already explained, interest is not taxable under the English Act unless it is actually received. In relation to interest it was said by Rowlatt J.-"It is to be remembered that for income tax purposes 'receivability' without receipt is nothing. Before a good debt is paid there is no such thing as income tax upon it. The meaning of the section must be 'receivability' speaking of a debt which has been received, and means the date on which it is paid as distinct from the date on which it was accruing" (1).
The respondent in this appeal relied very strongly upon this passage, but it should be observed that the learned judge was dealing with interest, which is taxed simply as interest: he was not dealing with the taxation of profits and gains. The last sentence in the passage quoted shows the distinction between the receipt of a debt and the accrual of a debt. In the South Australian statute the word "accruing" is used in s. 18 and in s. 22. It was not present in the provision which was interpreted in Leigh's Case [F5] .
Section 22 of the Taxation Acts deals with the period of time in respect of which the taxpayer is to make a return of his income. It contains the following provision:
"Subject to the other provisions of this Part, the taxable amount of the income of any taxpayer shall be ascertained as follows:
- 1.
- The accounts of income derived from personal exertion, and of income the produce of property, shall be calculated separately:
- 2.
- As to income derived from personal exertion, as well as to income consisting of the produce of property, the amount accruing to the taxpayer during the period of twelve months immediately preceding the time for calculation shall be taken as the basis for calculation."
As to income derived from personal exertion, the word "accruing" is used in relation to the period of time for which returns are to be made. If an amount accrues to a taxpayer during the relevant period then it must be included in his income. As already stated, a debt accrues due when it has become payable and not when it has been paid. If it has become payable during a particular period, it has accrued during that period. It must be included as income in the taxpayer's return even though it has not been paid.
Section 22 (xiv a) provides the other element which, in England, leads to the conclusion that book debts must be included in a return of income. It corresponds to rule 3 (i) applying to cases I. and II. contained in Schedule D in the English Act. This rule, it will be remembered, is at least part of the foundation of the rule that traders must include trade debts in their income. Section 22 (xiv a) is in the following terms:
"In calculating the net amount of income there shall be deducted debts actually written off as bad debts during the period in which the income was derived to the extent that such debts are proved to the satisfaction of the commissioner to be bad debts and are in respect of-(1) amounts which have been brought into account as gross income by the taxpayer in his return for any year; or ... Except as provided in this subdivision, no deduction for bad or doubtful debts shall be made."
This provision allows debts which have become bad to be written off in a year subsequent to that in which they were brought into account. It was substituted for an earlier provision corresponding with a provision which, in Gleaner Co Ltd v Assessment Committee [F6] , had been held to limit the deduction of bad debts to debts which arose in the year in respect of which the return was made. The important provision in that case was s. 10 of the Income Tax Law 1919 of Jamaica which prohibited any deduction in respect of any debts except bad debts proved to be such to the satisfaction of the Assessment Committee and doubtful debts to the extent that they were respectively estimated by the Assessment Committee to be bad. The Privy Council rejected the contention that the debts might be deducted, in any year in which they were found to be bad, from the profit of that year, and accepted the argument for the taxation authority that any deduction under this provision must be made in the year in which the debts had been included in the return. Referring, however, to the general principles of ascertaining profits and gains of a business, their Lordships said:"The income that is to be returned is the net income after deducting the expenses of acquiring the same, and, but for s. 10, it might well be argued that in the case of a business debts not actually received formed no part of the income at all, although, as is well known, the annual profits or gains of a trader are not properly measured by considering only the moneys taken. There must, in every profit and loss account, be an examination of the debts and a careful distinction between those that are good, doubtful and bad" [F7] . This statement involves the proposition that in the case of a trader, when his profits and gains are being ascertained, debts owed to him must be included in his income, even though it might be argued that they need not be included if the tax were imposed upon "income" and not, in terms, upon "profits and gains."
By parity of reasoning, where the profits and gains of a professional man are to be returned, debts due but not paid should, in my opinion, also be included.
The respondent relied strongly upon certain authorities which establish that in some cases income tax is imposed upon moneys only when they are actually received and not when they accrue due. An examination of these cases, however, will show that in every instance the tax was imposed upon something other than "profits and gains." Reference has already been made to Leigh v Inland Revenue Commissioner [F8] , where the tax was payable in respect of interest of money. It has been pointed out that in that case it was held that the interest must be received before it can be taxed. It may be noted that in such a case income tax is deducted at the source and is paid to the revenue authorities by the person who is liable to pay the interest. It is obvious that in such a case no account of profits or gains need be, or indeed can be, taken.
In St. Lucia Usines and Estates Co v St. Lucia (Colonial Treasurer) [F9] the Privy Council had to consider whether a company was liable to pay income tax upon "income arising and accruing" in the year 1921. The sum in question was part of the purchase price of land which fell due in 1921 but was not paid in that year though it was paid subsequently. It was held that the amount was not chargeable with tax in respect of the year 1921. It was said: "The words 'income arising or accruing' are not equivalent to the words 'Debts arising or accruing' " [F10] , and "a debt has accrued to him but income has not. It does not follow that income is confined to that which the taxpayer actually receives. When income tax is deducted at the source the taxpayer never receives the sum deducted but it accrues to him. It is said, and truly, that a commercial company, in preparing its balance-sheet and profit and loss account, does not confine itself to its actual receipts-does not prepare a mere cash account-but values its book debts and its stock in trade and so on and calculates its profits accordingly. From the practice of commerce and of accountants and from the necessity of the case this is so. But this is far from establishing that income arises or accrues from (as above instanced) an investment which fails to pay the interest due." It will be seen that the Judicial Committee was dealing with a case where the only provision under which tax could be charged was a provision relating to income arising or accruing. There was no provision for the ascertainment of profits and gains and for taxation upon profits and gains when ascertained. The words of the Judicial Committee show that where it is necessary to calculate profits it is necessary to value and to take into account book debts. Thus this case is distinguishable from the present case where profits and gains as such are expressly included within the definition of income.
Lambe v Inland Revenue Commissioner [F11] is a case in which it was held that where interest on a loan had not been paid and might never be paid, the amount of interest due ought not to be included in computing the taxpayer's income for income tax purposes for the year during which it was payable. This was a case similar to Leigh's Case [F12] dealing with interest due on a loan where "the tax is deducted at the appropriate rate" (by the person liable to pay the interest) "and the income is brought in as part of the income of the recipient" [F13] .
In Dewar v Inland Revenue Commissioner [F14] a legatee was entitled to claim payment in a particular year of interest on a legacy. He did not claim the interest and did not receive any interest. It was held that as the respondent had not received any of the interest there was no income in respect of it on which he could be charged to tax. This is also a case of taxation of interest under Schedule D, clause 1 (b) and the principles upon which it was decided are the same as in Leigh's Case [F15] . All these cases, therefore, are distinguishable from the present case.
Grey v Tiley [F16] was a case in which it was held that where a commission earned in one year had been paid, part in that year and part in later years, the income arose in the years when the payments on account were received. But the question in the case arose under case VI. of Schedule D dealing with casual profits. Rowlatt J. [F17] explained that no help was to be obtained from cases which really depended "on the accounts of a trader or profession or anything of that kind." He said that in cases "where the question was as to trading profit, in cases of that kind of course at the end of the year you would show your profits in accounts which took into consideration debts earned, debts due as assets."
The rest of this sentence is perhaps not perfectly clear in the report, but it is clear that the learned judge regarded it as essential to take into account debts accrued, but not paid, when the profits or gains of a trade or profession were being ascertained. Thus this case really supports the contention of the appellant in this appeal.
In Commissioner of Taxation (N.S.W.) v Lawford [F18] this court dealt with a case where income tax was claimed in respect of fees earned by a solicitor but paid after his death to his executrix. It was held that the moneys were not income derived by the executrix in her representative capacity. The commissioner did not in that case contend that the fees, when they accrued due as debts, were income of the deceased. It was sought to tax only moneys received by his personal representative under the terms of a section which referred to "income derived by (an executor) in his representative capacity." The only decision of this court was that the fees were not income of the executrix in her capacity as executrix and were not derived by her. Thus the decision does not assist the respondent in the present case, where the question does directly arise whether the fees of a professional man earned, but not paid in a certain year, are part of his income for that year under the provisions of the South Australian statute.
In the present case the commissioner for a number of years accepted returns upon a cash basis, and it is suggested that he is estopped therefore from claiming that the returns should have been made upon a different basis. The requirements of an estoppel, however, are not satisfied. In the present case there is no evidence that the taxpayer altered his position to his prejudice by taking advantage of the willingness of the commissioner to accept returns upon a cash basis. The only result of what the commissioner has done is that the taxpayer has not been required to pay amounts of income tax which he would otherwise have been compelled to pay. This temporary benefit to the taxpayer cannot be described as an alteration of his position to his prejudice brought about by an act of the commissioner. But, further, the commissioner has no power to excuse taxpayers from the duty of paying taxes in accordance with the law unless the statute expressly authorizes him to do so. The commissioner is bound by the statute and cannot, in the absence of express provision, relieve citizens from their obligation to obey the statute. If any other principle were adopted the public revenue could be prejudiced by mistakes on the part of the commissioner which could never be corrected, although it would still be open to taxpayers, upon objection and appeal, to challenge any act of the commissioner which was against their interests. There is, in my opinion, no reason for adopting a rule that a mistake of the commissioner in favour of a taxpayer cannot be corrected while an error of the commissioner against a taxpayer may be corrected. This opinion is in accordance with the decision of the Privy Council in Maritime Electric Co v General Dairies Ltd [F19] , where it was pointed out that estoppel is only a rule of evidence and that no estoppel can avail to release persons from an obligation to obey a statute which imposes a duty of a positive kind.
The statute there in question was a statute which defined the charges to be made for the supply of electric energy. A taxing statute is a statute which imposes positive duties upon taxpayers which cannot be reduced or abolished at the will of the public officer upon whom the duty of administering the statute is imposed. Thus the objection founded upon estoppel fails.
It is argued that the court should approve "the practice" of returning cash receipts because it is a recognized practice and because the question is really a business question. The answer to this argument is, I think, threefold. In the first place, there is no evidence whatever as to what the practice is. In the second place, any practice, even if it were universal, cannot control the statute if, upon its true construction, the practice is wrong or irrelevant. It has frequently been argued that the ascertainment of income is a "business" matter, so that, for example, a court must take "profits" as determined by business men, with such deductions as are reasonable and proper from a business point of view, and must then apply income tax provisions to profits so ascertained. (Contentions as to allowances for depreciation of plant, etc, provide a good illustration.) Warrington L.J., referring to an argument of this character, in Inland Revenue Commissioner v Von Glehn [F20] , at p. 567 said:"The question whether this deduction is to be allowed is one that must be determined by the rules regulating the assessment of income tax and not by rules regulating what may be allowed in the preparation either for a company, an individual, or a firm, of the balance-sheet or the profit and loss account. A firm or a company carrying on business may within certain limits treat as a deduction from profits such sums as it pleases, but for the purposes of income tax the deductions which may be allowed from the gross profits are strictly regulated by the Income Tax Acts." If the relevant Act deals with a matter in a particular manner, it is quite immaterial that taxpayers prefer to deal with it in another manner. It is for this reason that I have based my judgment entirely upon the statute and upon decisions which seem to me to be in point. If I were of opinion that no clear conclusion could be drawn from the words of the statute, the position, of course, would be very different.
In the third place, the argument in favour of the receipts basis was that it was "a" proper or appropriate method. No clear reply was given to the question whether the taxpayer had a right to choose his own method for himself, though it was denied that the commissioner had a right to impose a method upon him "compulsorily"-to use the language of the Supreme Court. But this denial was qualified by a willingness to concede that the commissioner perhaps was entitled to insist upon the earnings basis in respect of the period after the death of Dr. Carden. It was not explained why the commissioner could so insist in respect of one period and not in respect of a preceding period-except by the contention based upon estoppel, to which I have already referred. Further, the view that either method is permissible must involve one of two results: (1) that the taxpayer can change over from year to year as he chooses-a contention which has not been supported by argument and the adoption of which would obviously produce very strange results: or (2) that, when the taxpayer has once adopted one method, he must go on for ever following the same method unless (possibly) the commissioner consents to the adoption of the other method. There are several objections to this second proposition. In the first place, the Act does not, as I read it, permit of the introduction of such a principle either generally or in the case of professional men. Separate returns are made for each year. It has never yet been decided that the making of a return upon a particular basis for one year either entitles or binds the taxpayer to continue to make returns on the same basis for subsequent years. There are many decisions in this court in which the court has held that a long-continued practice was wrong simply because it was contrary to the terms of a taxation Act.
The adoption of any other view would involve the result that the meaning (not merely the result of the application) of the Act in any particular case might vary according to the practice of the particular taxpayer concerned if that practice had not been challenged by the taxation authorities upon its initiation. Further, for reasons already stated, the commissioner cannot "consent" to any practice if that practice is inconsistent with the Act. The Act contains a number of provisions which enable the commissioner to determine certain questions-for example, ss. 6 (4), 8, 9, 22 (xiv a), 22 A, 23 B, 23, 24 and other sections. If he exercises such powers and in a particular case accepts the view or contention of a taxpayer, he may be said to have given a "consent" which is effective. But it is effective, not as a consent, but as a decision; and it is effective only by reason of the express terms of the statute. If there is an imperative provision in the statute, the commissioner is bound to obey it, and he cannot, by any process of consent, in effect repeal it in the case of any taxpayer. If, upon the true construction of the Act, a professional man is bound to declare his profits and gains upon an earning basis, the fact that he has, in the past, declared them upon a receipts basis is irrelevant in relation to any return which is within any time limit permitted by the Act for reconsideration or re-assessment.
For the reasons stated I am of opinion that the taxpayer ought to have included in his returns book debts which fell due within the year in respect of which he was making a return of his income. But the taxpayer died on 15th November 1935. Can the commissioner now assess the company as Dr. Carden's executor in respect of book debts which had not in fact been included by him in any return? The Income Tax Acts contain a number of provisions dealing with the death of a taxpayer and with the responsibility of executors. These provisions overlap to some extent.
In the first appeal the question which is raised is whether the commissioner is entitled to include the whole of the unpaid book debts (now agreed at a sum of PD1,155) in a single assessment of the executors. The commissioner claims that he is entitled to make such an assessment by virtue of s. 84 (1) of Act 1927 which is as follows: "If the whole or any portion of the taxable amount of the income of any taxpayer is not included in an assessment in any year, the commissioner may include such whole or portion in the assessment of the taxable amount of the income of such taxpayer for a subsequent year."
If Dr. Carden had still been alive the commissioner could under the clear words of this section have included in an assessment made in 1935 the whole of the taxable amount of the taxpayer's income which had not been included in prior assessments. Unless s. 84 is so construed according to the natural meaning of its words it is difficult to give any meaning to the provision. It is true that s. 87 provides that, except on the ground of fraud, no assessment for income tax shall be re-opened by the commissioner in respect of any return made more than three years last preceding the opening. But when the commissioner applies s. 84 he does not re-open any assessment for past years. He simply includes in one assessment income omitted from prior assessments. So also s. 88 does not operate to limit the power of the commissioner under s. 84. Section 88 provides that "Except in case of default in furnishing an income return, or of any fraudulent return, no taxpayer shall be required to give any account of his income for more than three years from the date of the inquiry." No question arises as to the power of the commissioner to compel the taxpayer to give any account of income for more than three years from any particular date. The commissioner has the necessary information and simply includes the omitted income in a return by virtue of s. 84.
But it is contended that s. 84 only applies to the taxpayer himself and that it cannot be applied to his executor. It relates to the income of "any taxpayer" and to an assessment of the taxable amount of the income of "such taxpayer." It is argued that these words cannot be so interpreted as to impose any liability upon an executor of a taxpayer. This contention makes it necessary to examine s. 41 and s. 42 of the Act.
Section 41 provides that every executor shall be a taxpayer in his representative capacity. Section 42 provides that the legal personal representative administering the estate of persons who died after the commencement of the Act shall be a taxpayer in a representative capacity in respect of-(1) the income of a deceased person from the 1st July last preceding his decease up to his decease; (2) the income of the deceased person in the period of twelve months immediately prior to the said first day of July; and (3) the income of any period not earlier than five years before the death of the taxpayer in respect of which the deceased person was a taxpayer and failed to furnish a return.
It has been contended that the concluding words refer only to "periods in respect of which" the deceased person was a taxpayer and not to income of the periods in respect of which he was a taxpayer and failed to furnish a return. If this is the true construction, then the provision marked (3) has no application in the case of any year if the taxpayer has sent in any return for that year, even if he admittedly omitted income in that return. If the real income was PD10,000 and the taxpayer only returned PD100, the provision would not apply to his executors. If this is the true construction, it must be accepted, but the result is so surprising that the question should be carefully considered before such a construction is adopted. In my opinion the provision should not be so construed. I read the section as dealing with the income of three periods-the whole income of the first and second periods, and any income of the third period in respect of which no return has been furnished. In (1) and (2) the substantive description of the income of the periods mentioned is unqualified. In (3) the substantive description of such income is qualified by the words "in respect of which the deceased person was a taxpayer and failed to furnish a return." The deceased person would be a taxpayer in respect of "the income" as well as in respect of "the period." If there were no income, there would be no tax. It is the receipt of income and not merely the transition of a period which creates a liability to taxation. The result of this construction is that the personal representative would be liable to make returns in respect of all the income of the periods mentioned in (1) and (2), but only in respect of the income of any other periods included in (3) which had not been returned by the deceased. So construed the section is a very reasonable provision. The words are capable of this construction and the arrangement of the whole section suggests such a construction.
The contrary view, which attaches the final words to "period" and not to "income," would permit avoidance of taxation admittedly otherwise payable if a purely nominal and false return had been made for a particular year, though it would secure full taxation if no return at all had been made. The other construction secures proper taxation, not only in the case of complete omission to make any return, but also whenever income which has not been returned should have been returned. In my opinion this latter construction is more reasonable than the other-the words are readily capable of it and it should be adopted.
Thus the company in the present case as the executor of Dr. Carden is a taxpayer in a representative capacity in respect of his income (1) from 1st July 1935 to 15th November 1935, (2) in the period 1st July 1934 to 30th June 1935, (3) of the period 15th November 1930 to 15th November 1935 in respect of any income in respect of which Dr. Carden was a taxpayer and failed to furnish a return.
Section. 42 (2) provides that the personal representative shall in respect of the income referred to in the section furnish the returns which the deceased person should if living have furnished. Section 42 (3) entitles the commissioner at any time by particular notice to require the personal representative to furnish the returns of income in respect of which the personal representative is taxable in a representative capacity. Under these provisions, therefore, the commissioner can require the company to furnish the returns which Dr. Carden should have furnished and in particular may require the company to furnish returns in respect of income during the periods specified in sub-s. 1. Sub-ss. 3 (b) and (c) entitle the commissioner to make assessments of the personal representative on the returns so furnished or to make assessments in default of such returns or without requiring any return. Section 42 (2) (c) confers on the personal representative a right of appeal against assessments in the manner and time and upon the ground in and upon which the testator if living might have appealed.
These provisions therefore entitle the commissioner to assess the executor just as if the executor were the deceased person and that person were living, and they also confer upon the executor all the rights which the testator would have had if he had been alive. If the testator had been alive s. 84 would have applied and the commissioner is therefore entitled to make an assessment upon the basis of s. 84 against the executor in respect of Dr. Carden's income ascertained in accordance with the true construction of the provisions of the Act.
The commissioner is therefore entitled, in my opinion, to include in the assessment which is the subject of objection in the first appeal the whole amount of the book debts, namely, PD1,155, which ought to have been included in assessments for earlier years. If the commissioner should insist upon exercising the rights conferred upon him by s. 84, it would be unnecessary to answer the questions which arise upon the second appeal, which relates to assessments in which the book debts have been assigned as income to past relevant years.
But though the commissioner is entitled to apply s. 84 he is not bound to apply it. The addition of the total amount of book debts to the last assessment would apparently mean in this case that a higher rate of tax would become payable upon the disputed amount than would otherwise be the case. Assessments distributing the book debts over the years in which they accrued would be fairer and more favourable to the taxpayer's estate. If the commissioner is content to tax upon the more considerate basis, he is able to do so if s. 43 is applicable. The amended assessments would then be at the rates payable in respect of the years for which income tax ought to have been paid. Section 43 applies to all cases where, whether intentionally or not, the taxpayer escapes full taxation in his lifetime by reason of not having duly made full, complete, and accurate returns. In the present case the taxpayer has, upon the view which I have taken of the Act, escaped full taxation by reason of the fact that he did not include all his income in his returns. It is true that he made these returns by the permission and with the consent of the commissioner, but it was the absence of accuracy in the returns, and the misunderstanding both of the commissioner and of the taxpayer as to what was required in order that returns should be accurate, which brought about the result of the taxpayer escaping full taxation. Therefore, in my opinion, the section is applicable. Upon any other view the commissioner could never apply s. 43 so as to review any assessment upon returns which he at the time had accepted as full, complete and accurate and which the taxpayer had also regarded as full, complete and accurate. It could always be argued in such a case that the taxpayer had escaped full taxation by reason of the consent of the commissioner and not by reason of not having made full, complete and accurate returns.
I can see no reason for limiting the operation of the section by any such reference to the mental attitudes of the commissioner and of taxpayer. Where s. 43 is applicable the assessment is to be at the rates payable in respect of the years for which the income tax ought to have been paid (s. 43 (c)) and must obviously be an assessment with respect only to the income of those years respectively.
But action under s. 43 involves alteration of prior assessments and therefore, in this case, the re-opening of assessments made in respect of the years ending 30th June 1934 and 30th June 1935. The return for the former year was made on 12th April 1935 and for the latter year on 31st August 1935. The re-assessments which are the subject of the second appeal were made on 4th July 1938, that is, more than three years after the date of the return for the year ending 30th June 1934. The re-assessment for the year ending 30th June 1935 was made within three years of the date (31st August 1935) when the return for that year was made.
Section 87 provides that, except in the case of fraud, no assessment shall be re-opened in respect of any return made more than three years last preceding the re-opening. There is no fraud in the present case. If the section is applicable, the commissioner cannot re-open the assessment for the earlier years, but he is not prevented by the section from re-opening the assessment for the later year.
But it may be suggested that the general provision contained in s. 87 is not applicable after a taxpayer has died. The argument would be that s. 42 is a special provision for the case of a taxpayer who has died; the section specifically makes the executor of the deceased liable in respect of the income of a five-year period before the death of the taxpayer; therefore the application of s. 87, limiting re-opening of assessments to a three-year period is excluded in all cases falling under s. 42, where a five-year limitation only is relevant. In my opinion, this argument is not well-founded. Section 43 does not impose upon the executor any greater liability than the Act would have imposed upon the deceased if he had been alive. If he had been alive s. 87 would, except in the case of fraud, have prevented the re-opening of any assessment upon a return made three years before the re-opening. The same provision applies in the case of his executor. If there had been fraud, the deceased himself would during his life have been subject to the risk of having all past assessments affected by fraud re-opened without any time limit. Section 43, however, in the case of an executor, imposes a five-year limit even in the case of fraud by the deceased. Thus the section does not increase, but on the contrary it diminishes, the liability of the executor as compared with that of the deceased.
Under s. 42 the liability of the executor extends to a period of five years before the death of the taxpayer. The taxpayer died on 15th November 1935. The commissioner does not, in the re-assessments made, seek to go further back than to the period beginning on 1st July 1933. Thus s. 42 presents no obstacle to the commissioner by way of time limitation. But, for the reasons stated, I am of opinion that s. 87, if taken by itself, does prevent any re-opening of the assessment in respect of the year ending 30th June 1934 because the taxpayer's return for that year was made on 12th April 1935 - more than three years before the re-opening of the assessment by the re-assessment of 4th July 1938. There is no such obstacle to prevent re-assessment for the year ending 30th June 1935.
But s. 87 cannot be taken by itself. It must be read in conjunction with the other provisions of the Act. Section 43 is a special provision applying only in the case of the death of a taxpayer. Par. d of that section provides in unequivocal terms: "No lapse of time shall prevent the operation of this section." Thus, if a case falls within the section, the commissioner is not limited by s. 87. Any other view would deprive par. d of all meaning-it could have no operation whatever in any case. The three years limitation in s. 87 would be effective; the five years limitation in s. 42 would be effective; but the exclusion of any time limitation in s. 43 would never be effective. Accordingly I am of opinion that, in this case, to which, as I have already said, I think s. 43 applies, there is no time limitation which prevents the commissioner from requiring and making assessments for both of the years in question.
The special cases also raise the question whether an amount of PD248 representing the expenses of Dr. Carden in carrying on his practice from 1st July 1935 to the date of his death can properly be allowed as a deduction. Expenses can be deducted if they were "actually incurred by the taxpayer in the production of the income" (s. 22 (x)). If the income which is taxable includes cash receipts, but not book debts, then, the commissioner contends, only such portion of the expenses as can be shown to have been incurred in the production of the cash receipts during the period can be deducted: some portion must be attributed to the cases which Dr. Carden treated in respect of which he was not paid his fees before his death and that portion cannot be deducted under s. 22 (x). But upon the view which I take as to the first question asked in the special cases this question with respect to deduction does not arise. If the book debts accuring during the period, as well as the cash receipts, must be returned as income of the period, then plainly the whole amount of the expenses mentioned must be allowed as a deduction. Thus no answer to the second question in the first case is required.
The questions in the first case should be answered as follows:(1) Yes-PD2,119. (2) No answer.
The questions in the second case should be answered as follows:(1) Yes, (a) for the year ending 30th June 1934, the sum of PD514, (b) for the year ending 30th June 1935, the sum of PD476. (2) Yes for both of the said years.
Although in my opinion the respondent company should fail in these appeals, I think that there should be no order for costs in the proceedings. The taxpayer altered the form in which his returns were made by reason of a change in the printed form provided by the taxation department for making returns. If the commissioner succeeded upon the appeals he would do so only by challenging the basis upon which he invited the taxpayer to make his returns. In these circumstances there should, I think, be no order as to the costs of any of the proceedings even if the judgment of the court were in accordance with the views which I have expressed.