Commissioner of Taxes (South Australia) v Executor Trustee and Agency Co of South Australia Ltd
63 CLR 108(Judgment by: Dixon J.) Court:
Judges:
Latham CJ
Rich J
Dixon JMcTiernan 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:
Dixon J.
Dr. Carden practised medicine in South Australia for many years before his death, which occurred on 15th November 1935. On his death the Commissioner of Taxation learned that his assets included a substantial amount of unpaid professional fees.
These appeals arise out of the attempts of the commissioner, who is the appellant, to assess his executors, who are the respondents, to income tax in respect of the whole or some part of the unpaid fees.
Up to the year of income beginning 1st July 1929, Dr. Carden included in his returns of income all the fees he had earned during the particular accounting period, whether he had received payment or not.
Under the now repealed Taxation Act 1927-1933 (S.A.), which governs these matters, it is for the Governor in Council, by regulations having the force of law, to prescribe the returns to be furnished by any party and the form and contents thereof (s. 112). The Act provides also that where forms of return applicable in any particular case are supplied by the commissioner to the public, the return shall be in the form so supplied, and shall contain all the particulars indicated in the form which are applicable to the particular case (s. 63 (1)).
For the year of income beginning 1st July 1929 Dr. Carden changed the basis upon which he made up his return of professional income. Instead of returning, as theretofore, the fees earned, whether paid or unpaid, during the year of account, he returned the fees received in that year. The special case does not state whether this was done because of any change in the form or the instructions supplied by the commissioner. It was suggested by counsel for the taxpayers that the change in Dr. Carden's method of computation was so to be accounted for. But I am not sure that counsel for the commissioner acquiesced in the suggestion. However, the basis of the returns must have been clear to the commissioner, and it was a basis which he allowed, if he did not invite it.
Since that time Dr. Carden's professional income has been returned year by year in the same way, that is, by including his actual receipts for the period of account and disregarding fees earned but unpaid. In continuing to return his professional income on the basis of actual receipts, Dr. Carden took a consistent course and one which, if it was not directed by the forms of instruction given to taxpayers, appears to have been conformable with the commissioner's requirements. It was the basis adopted by the commissioner, and he assessed Dr. Carden accordingly during his lifetime. The last assessment was in respect of the income year preceding his death, namely, that ending 30th June 1935. But, except under some special statutory provision, the system of assessing upon actual receipts cannot be applied to the receipts of executors in respect of fees earned by their testators. For an executor obtains such payments, not as income earned by him in his representative capacity, but as part of the capital assets of the estate (Commissioner of Taxation (N.S.W.) v Lawford [F21] ). The commissioner, therefore, deserted the basis of assessment he had followed in Dr. Carden's lifetime, and proceeded to assess the unpaid fees to income tax upon the footing that they ought to have been returned by him during the various years in which they were earned. A little consideration will show that when, as at 30th June 1929, the change was made in the mode of return and of assessment a rigid adherence to the receipts basis of assessment would have resulted in the inclusion of the same fees in two different assessments, fees earned before 1st July 1929 but paid on or after that date. If this was done the commissioner was, so to speak, providing in advance against the future contingency of Dr. Carden's ceasing to be a taxpayer at a time when professional earnings were outstanding and unpaid.
To adhere rigidly to the receipts basis, disregarding the fact that some of the receipts represent fees which have been included as earnings in a prior assessment, would, I think, have been by no means indefensible. For the two methods of ascertaining the income of a professional man are rival systems of account, each put forward by its supporters as an appropriate and satisfactory basis of computation. There is, therefore, no abstract reason why, when a change from one to the other is made, an adjustment should be attempted by excluding from the later assessments receipts in respect of fees already included in earlier assessments made on an earnings basis. Indeed, there is the authority of the Court of Session for the view that such an adjustment must not be made: See Commissioners of Inland Revenue v Morrison [F22] , at pp. 328, 330, 331. But if such receipts were not excluded, there would be no justification for deserting the receipts standard after Dr. Carden's death. Whether in fact such an adjustment was made or attempted is the subject of doubt. The language of the special cases is hardly consistent with its having been done. They say that for each of the years after 1st July 1929 the deceased returned as his gross income for taxation purposes from his medical practice his actual receipts from such practice in each year omitting book debts. But Napier J., in delivering the judgment of the Full Court, stated the fact to be that the actual receipts in cash (omitting the payment of debts incurred prior to 1929 upon which tax had been paid) were returned as the gross income.
When the commissioner first put forward his claim against the executors, he mistakenly included unpaid fees earned before 1st July 1929. But, as a result of adjustments and modifications, the claim he now makes is to assess the executors to tax in respect of an amount of PD2,119, representing debts which he considers that the executors will recover in respect of fees all earned since 1st July 1929. Of this amount PD514 was earned in the year of income beginning on 1st July 1933 and ending on 30th June 1934; and PD476 in the year of income beginning 1st July 1934 and ending on 30th June 1935, and PD156 in the broken period beginning on 1st July 1935 and ending with Dr. Carden's death on 15th November 1935. The remaining amount, PD973, was earned sometime between 1st July 1929 and 30th June 1934.
Two alternative methods of assessment have been adopted by the commissioner for the purpose of bringing the unpaid fees into tax. The method which he followed in the first instance was to include in his assessment of the executors in respect of the period from 1st July 1935 to 15th November 1935 the amount of the fees considered recoverable, without regard to the year of income in which they were earned. This was done upon the assumption that s. 84 (1) applied to the case. That sub-section provides that, 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. It having been decided by the Supreme Court that s. 84 has no direct application when what is under consideration is the assessment of executors upon the income of their testator, and that its indirect application was of a very limited description, the commissioner, in order to submit to the decision of this court the question of the executors' liability in as wide a form as possible, issued amended assessments in respect of the years ended 30th June 1934 and 1935 by which the respective sums of PD514 and PD476 were included in the assessable income of the deceased. It was not intended that these last assessments should stand if the court was of opinion that s. 84 applied. If, however, it was of the contrary opinion, the commissioner intended to fall back upon the two separate assessments for the years ended 30th June 1934 and 1935. All this is, of course, upon the assumption that Dr. Carden should have been taxed on his earnings and not on his receipts.
The first question for decision is whether, upon this assumption, s. 84 authorizes the inclusion of unpaid fees earned before 1st July 1935 in the assessment for the period between that date and Dr. Carden's death on 15th November 1935. In my opinion it does not do so. It has not a direct application of its own force. For its terms do not cover the inclusion in an assessment upon an executor of income omitted from an assessment made upon a testator in his lifetime. When it authorizes the commissioner to include the omitted income of a taxpayer "in the assessment of the taxable amount of the income of such taxpayer," it supposes an identity of the taxpayer who is assessed. Dr. Carden, however, is one taxpayer and his executors form another and independent taxpayer. It is true that an assessment of the executors to income tax upon the taxable income for the broken period from 1st July to 15th November 1935 is an assessment of the taxable income of Dr. Carden for a subsequent year and it is true that he was a taxpayer. But he did not fill that description when the assessment for the subsequent year was made. Even that description cannot be fastened upon the dead. But the commissioner relies upon two provisions relating to the income of deceased persons, one or other of which, according to his contention, takes up s. 84 and makes it applicable to the assessment of the executors so as to authorize him to include the omitted income of a deceased person for a past year in an assessment of his executors in respect of a subsequent year. One of the two provisions is s. 43. The purpose of that section in the event which it specifies is to give to the commissioner the same powers and remedies against an executor as he would have had against the deceased in his lifetime, and to do so notwithstanding lapse of time, and, further, to impose a penal liability for double the amount of tax.
But the section applies only in the specified event which, in the language of the provision, is "where, whether intentionally or not, a taxpayer escapes full taxation in his lifetime by reason of not having duly made full, complete and accurate returns."
As is shown by the imposition of a penal liability for tax, the section relates to a default on the part of the taxpayer in relation to his returns, a default "by reason" of which he "escaped" full taxation. I do not think that the facts of Dr. Carden's case satisfy this condition. It may well be doubted whether, seeing that he made his returns in the form allowed, if not authorized, by the commissioner, he did not make full, complete and accurate returns, even if it be true that according to law the basis of computing the tax imposed by the statute is that of "earnings" and not of "receipts." But in any case I do not think that it was "by reason" of his returns that he was not taxed on the earnings basis. It was by reason of the commissioner's adopting the receipts basis for professional income. The commissioner was not misled. He was fully aware of the two modes of computation and chose receipts and not earnings. The taxpayer's return was in accordance with the commissioner's choice.
The second of the two provisions relied upon by the commissioner for the purpose of making s. 84 applicable to such a case as the present is s. 42. Section 42 (1) provides that the legal personal representative of a deceased person "shall be a taxpayer in a representative capacity in respect of the income of the deceased person from the first day of July last preceding his decease, up to his decease, and in the period of twelve months immediately prior to the said first day of July, and also in respect of 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."
This provision does not, in my opinion, make s. 84 applicable so as to enable the commissioner to include in an assessment upon an executor income which accrued in the lifetime of the deceased in a past year, but was not included in the deceased's assessment in respect of that year. The purpose of the provision is to empower the commissioner to make the executor a taxpayer in respect of the three periods it specifies. But it makes the executor an independent taxpayer and it does not treat him as, so to speak, an extension or continuation of the deceased's personality and identity as a taxpayer. It leaves untouched the effect of death in interrupting the continuity of a deceased's character of taxpayer, but makes his legal personal representative a taxpayer liable to furnish returns in respect of the deceased's income and bound by assessments whether upon the deceased or upon an executor or administrator himself. This is made clear by sub-ss. 2, 3, 4 and 5, which it is unnecessary to set out. Sub-s. 5 is a special provision dealing with the rates of tax and it may be remarked, as a subsidiary consideration, that in some circumstances it would be difficult, if not impossible, to apply it to an assessment under s. 84.
I am of opinion, therefore, that s. 84 has no application to income alleged to have been omitted from assessments made upon Dr. Carden.
The special case which raises this question appears to imply that assessments were made upon him in respect of the years of income up to that in the course of which he died, that is, up to 1st July 1935.
But the second special case says that the assessment in respect of the year of income ending 30th June 1935 was made on 14th March 1936, that is, after his death. It does not appear whether it was made in his name as if he were alive or upon the executors under s. 42.
In the former case the executors would be bound under sub-s. 2 (b) of s. 42: but I do not think that s. 84 would apply to income omitted therefrom, so as to allow of its inclusion in the assessment on the executors for the broken period of the following year. In the latter case, it is possible that s. 84 would apply in respect of income not included in the assessment for the year ending 30th June 1935. The question has not, however, been raised and the facts upon which it depends are left unstated. But, subject to this question, I think that the commissioner was not empowered to include in the assessment upon the executors in respect of the period from 1st July 1935 to 15th November 1935 any of the income which he alleges was not included in the assessments for the five years of income from 1st July 1929 to 30th June 1935.
It is, therefore, necessary to consider the alternative assessments relied upon by the commissioner, which are the subject of the second special case. They are two in number and are amended assessments for the years of income ending 30th June 1934 and 1935 respectively. They are made under the combined operation of s. 42 and of s. 81, which provides that it shall be lawful for the commissioner in any case to alter (or reduce) any assessment.
As to the year ending 30th June 1934, I think it falls outside the authority given by s. 42 (1). It clearly does so unless it can be brought within the last words of the sub-section, viz., "and also in respect of 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."
Dr. Carden did not fail to furnish a return in respect of the period consisting of the year ending 30th June 1934, and for this reason I think that the words do not apply. It is suggested, however, that in the return which he made he did not include income represented by the difference between that computed by the receipts method which he followed and the amount computed by the earnings method, and that it might, therefore, be said that he failed to furnish a return in respect of that income. It does not appear that the amounts resulting from a computation of income on a receipts basis for that particular year was less than the amount computed on an earnings basis and there is no reason for supposing that it would be so. But this consideration may be put on one side as raising a question of fact which might require investigation. Resting upon the view that there was on the part of Dr. Carden a failure to furnish a return in respect of some income of that year, the commissioner contends that such a failure is enough to fulfil the condition laid down by the last words of sub-s. 1 of s. 42. He begins by attaching the words "in respect of which" to the word "income" and not to the last antecedent, viz., the word "period." With this foundation of syntax as a starting point, he makes the expression "the income of any period" include any part of the income derived in the period.
I am unable to adopt this interpretation of the clause. The sub-section is dealing with periods. When it reaches the longest retrospective period, it introduces a condition that the deceased shall have failed to furnish a return. The natural meaning of these words is failure to furnish any return of income. There is a clear distinction between omitting items of income or understating income in a return and failing to furnish a return. This distinction the Act makes in terms. Sub-s. 1 of s. 64 provides that every taxpayer who fails to furnish any return shall be guilty of a misdemeanour; sub-s. 3 says that, notwithstanding sub-s. 1, a taxpayer who fails to include in his return any income or includes an amount of expenses in excess of that incurred shall pay additional tax. It is possible that sub-s. 1 of s. 64, which refers back to s. 63, is speaking of a failure to furnish a return setting forth a full and complete statement of income. But there is no such reference in s. 42 (1) and s. 64 clearly marks the distinction. Further, what I should take to be the natural sense of the expression is borne out by the grammar. For prima facie the grammatical antecedent of the relative "which," in the expression "in respect of which," is the word "period." In any case to furnish a return in respect of income computed on an erroneous basis is hardly to fail to furnish a return in respect of the income.
I am, therefore, of opinion that no affirmative power can be found supporting the amended assessment for the year ending 30th June 1934. But that amended assessment is also attacked as being out of time. Section 87 provides that "except on account of fraud, no assessment for income tax shall be reopened by the commissioner in respect of any return made more than three years last preceding the reopening."
The return was made more than three years before the amendment. This appears to me to be a fatal bar.
But, in respect of the year ending 30th June 1935, I think that s. 42 (1) operates to enable the commissioner under s. 81 to alter the deceased's assessment by increasing the amount, that is, of course, if in point of law it ought to be made up on the earnings basis and if to do so would result in a greater amount of income for that year. Section 81 authorizes alterations imposing additional tax: Cf. ss. 87 and 89. Although the particular provisions of sub-ss. 2 and 3 of s. 42 do not expressly include alterations, I see no reason why the general words of sub-s. 1 should not subject the executors to liability under an altered assessment. The result is that, in my opinion, the powers of the commissioner under s. 42 enabled him to make an altered or amended assessment upon the executors for the year ending 30th June 1935. The question whether he ought to have done so depends upon the substantive question whether to assess Dr. Carden's professional income upon the basis of receipts was not in accordance with law. For the broken period, the commissioner clearly had power to assess the executors. But the substantive question for that period may perhaps be more accurately stated to be whether it is wrong on the part of the commissioner to compute the professional income upon an earnings basis. For one view suggested is that a choice between the two methods is permitted by law and that choice lies with the commissioner.
The question whether one method of accounting or another should be employed in assessing taxable income derived from a given pursuit is one the decision of which falls within the province of courts of law possessing jurisdiction to hear appeals from assessments. It is, moreover, a question which must be decided according to legal principles. In the dichotomy between questions of fact and of law upon which courts so continually insist in dealing with the problems of income tax they are called upon to solve, there are thus grounds enough for placing it under the category of questions of law. But it is, I think, a mistake to treat such a question as depending upon a search for an answer in the provisions of the legislation; a search for some expression of direct intention to be extracted from the text, however much it may be hidden or obscured by the form of the enactment.
Income, profits and gains are conceptions of the world of affairs and particularly of business. They are conceptions which cover an almost infinite variety of activities. It may be said that every recurrent accrual of advantages capable of expression in terms of money is susceptible of inclusion under these conceptions. No single formula could be devised which would effectually reduce to the just expression of a net money sum the annual result of every kind of pursuit or activity by which the members of a community seek livelihood or wealth. But in nearly every department of enterprise and employment the course of affairs and the practice of business have developed methods of estimating or computing in terms of money the result over an interval of time produced by the operations of business, by the work of the individual, or by the use of capital. The practice of these methods of computation and the general recognition of the principles upon which they proceed are responsible in a great measure for the conceptions of income, profit and gain and, therefore, may be said to enter into the determination or definition of the subject which the legislature has undertaken to tax. The courts have always regarded the ascertainment of income as governed by the principles recognized or followed in business and commerce, unless the legislature has itself made some specific provision affecting a particular matter or question. Familiar but striking examples of this necessary reliance upon commercial principles and general business understanding may be found in the case law dealing with expenditure laid out for the purpose of trade, with outgoings on account of capital, with capital profits, and with the question whether items should be taken into consideration for any given accounting period rather than for that which follows or perhaps for that which preceded. Speaking in reference to a fire insurance company, Viscount Haldane said in Sun Insurance Office v Clark [F23] , at p. 455:
"It is plain that the question of what is or is not profit or gain must primarily be one of fact, and of fact to be ascertained by the tests applied in ordinary business. Questions of law can only arise when ... some express statutory direction applies and excludes ordinary commercial practice, or where, by reason of it being impracticable to ascertain the facts sufficiently, some presumption has to be invoked to fill the gap."
It is, perhaps, true that with the growth of experience in the taxation of income and the widening of the area and increase in the weight of liability, the legislative tendency has been to add to the number of specific provisions governing the ascertainment of taxable income. But it is worth noticing that the British Income Tax Codification Committee decided that, in dealing with the computation of profits from businesses, their draft code should first contain a statement that the computation is to be made on ordinary commercial principles and should then set out a list of specific matters allowed or disallowed in computing profits for income tax purposes [F24] .
The tendency of judicial decision has been to place increasing reliance upon the conceptions of business and the principles and practices of commercial accountancy. In the case cited, Lord Loreburn [F25] went even further than Viscount Haldane. He said:
"There is no rule of law as to the proper way of making an estimate. There is no way of estimating which is right or wrong in itself. It is a question of fact and figures whether the way of making the estimate in any case is the best way for that case."
But the process by which the principles and practices evolved in business or general affairs are drawn upon for the solution of questions presented to courts of law almost inevitably leads to a development in the law itself. For, under our system of precedent, a decision adopting or resorting to any given accounting principle or application of principle is almost bound to settle for the future the rule to be observed and the rule thus comes to look very like a proposition of law. But in some matters, particularly in the attribution of expenditure between capital and income, the courts have found it impossible to formulate a principle as an induction from commercial practice and have left the matter almost as much as ever in the realm of fact or discretionary judgment. Thus, in Lothian Chemical Co Ltd v Rogers [F26] Lord Clyde says:
"It has been said times without number-it has been said repeatedly in this court-that in considering what is the true balance of profits and gains in the Income Tax Acts-and it is not less true of the Act of 1918 than of its predecessors-you deal in the main with ordinary principles of commercial accounting. They do expressly exclude a number of deductions and allowances, some of which according to the ordinary principles of commercial accounting might be allowable. But where these ordinary principles are not invaded by statute they must be allowed to prevail. It is according to the legitimate principles of commercial practice to draw distinctions, and sharp distinctions, between capital and revenue expenditure, and it is no use criticizing these, as it is easy to do, upon the ground that if you apply logic to them they become more or less indefensible. They are matters of practical convenience, but practical convenience which is undoubtedly embodied in the generally understood principles of commercial accounting."
In the present case we are concerned with rival methods of accounting directed to the same purpose, namely, the purpose of ascertaining the true income. Unless in the statute itself some definite direction is discoverable, I think that the admissibility of the method which in fact has been pursued must depend upon its actual appropriateness. In other words, the inquiry should be whether in the circumstances of the case it is calculated to give a substantially correct reflex of the taxpayer's true income. We are so accustomed to commercial accounts of manufacturing or trading operations, where the object is to show the gain upon a comparison of the respective positions at the beginning and end of a period of production or trading, that it is easy to forget the reasons which underlie the application of such a method of accounting to the purpose of ascertaining taxable income. Although the field of profit-making which it covers in practice is probably much greater than any other among the manifold forms of income or revenue, it is a system of accounting which does not represent the primary or basal position from which an investigation of income for taxation purposes begins. Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately realizable form. Thus, in Thorogood's Case [F27] , where the question was whether, in a business of buying land and selling it in subdivision on instalment contracts, future instalments of purchase money should be taken into the account of taxable income derived during the accounting period, the court pronounced decisively against the inclusion of the present value of these future payments. Isaacs J. said: "'Derived' is not necessarily actually received, but ordinarily that is the mode of derivation."
Substantially the same thing is said in reference to the words "arising or accruing" by Sir Houldsworth Shaw and Mr. Baker in their work on the Law of Income Tax, and they place the distinction upon the difference between trading and other sources of income. They say:"There is an important distinction between debts due to a trading company and unpaid in a particular year or period and other income which is not a trade receipt. Trading debts due but not yet paid must be included in arriving at the balance of profits or gains. With regard, however, to other income there must be something 'coming in'; that is, for income tax purposes, receivability without receipt is nothing" (Law of Income Tax, p. 111). Compare the article on Income Tax by the same authors in Halsbury's Laws of England, 2nd ed., vol. 17, p. 85; and cf. St. Lucia Usines and Estates Co Ltd v St. Lucia (Colonial Treasurer) [F28] .
The reasons which underlie the practice of estimating for taxation purposes the income from trade or manufacture by means of a commercial profit and loss account consist in the impracticability of computing income in any other way and in the adoption for fiscal purposes of recognized commercial principles. The computation of profits from manufacture and trading has always proceeded upon the principle that the profit may be contained in stock-in-trade and "outstandings." Whether this is to be explained on some view that the purpose is to ascertain what is the detachable increase in circulating capital, or more simply on the ground of common sense and the teachings of experience, the result for the purposes of taxation is the same. The result is that a tax upon the profits or income of such a business must be understood as a tax upon the profits or income computed according to the system, because, according to common understanding and commercial principles, that is the method of determining the profits. The basis of a trading account is stock on hand at the beginning and end of the period and sales and purchases. In such an account book debts represent what before sale was trading stock and it is almost inevitable that they should be taken into consideration upon an accrual and not a cash basis. But nearly all income tax legislation is against the practice which obtains commercially of making a reserve for bad debts or discounting the amount of book debts by a percentage for bad or doubtful debts. Specific provision is usually made for the deduction from the book debts accruing during the accounting period of such debts only as have proved to be bad during that period and have been written off. Usually the deduction is authorized also of book debts included in a previous accounting period which in the year under assessment prove to be bad and have been written off.
Then book debts written off as bad which in a subsequent accounting period are nevertheless paid are to be brought in as receipts of that subsequent period: Cf. Elder Smith & Co Ltd v Commissioner of Taxation (N.S.W.) [F29] .
The Taxation Act 1927-1933 (S.A.) contains a provision of this kind (s. 22 (xiva)). The words with which it concludes give the key to the purpose of the provision:Except as provided in this subdivision, no deduction for bad or doubtful debts shall be made. I do not regard s. 22 (xiva) as implying that in every case where the business or pursuit of the taxpayer involves the giving of credit, the debts or book debts owing to him must be brought into the computation of his taxable income without regard to the accounting period within which they are paid or payable. The distinction, if not opposition, between the mode of accounting sometimes called the accrual system and that based upon actual receipts and disbursements is widely known. The foundation of the accrual system is the view that the accounts should show at once the liabilities incurred and the revenue earned, independently of the date when payment is made or becomes due. It plainly is not applicable to every pursuit by which income is earned. The Taxation Act 1927-1933 (S.A.) does not appear to me to intend to fix it upon every business and vocation which involves the giving of credit. But it does contemplate the application of the system, whether with severe consistency or in modified form, to many, if not most, undertakings and enterprises and for that reason directs specifically what deduction on account of bad and doubtful debts shall be allowed.
In the language employed by the statute in describing the subject of the tax, I am unable to find any special guidance or anything distinguishing the South Australian statute from other income tax legislation in reference to the choice between the accrual and the receipts basis of calculation. The tax is imposed on all incomes arising or accruing in or derived from the State (s. 18 (1)). To obtain the taxable amount of income, calculations of income the produce of property and of income from personal exertion must be separately made and for the purposes of calculating the latter the amount to be taken is that accruing to the taxpayer during the previous twelve months (s. 22 (i) and (ii)). Income from personal exertion includes, by definition, every kind of profit and every kind of gain not being income from property, subject to certain exceptions (s. 4). The word "derived" is the equivalent of "arising" or "accruing": See per Isaacs J. in Harding v Federal Commissioner of Taxation [F30] , at p. 133. At all events none of these three words contains any particular indication of intention upon the question in hand. Nor does the use of the word, "profit," "gain" and "income" appear to me to throw any light upon it. They do not decide the question. They in no way remove the necessity of discovering whether, as a matter of fact, the basis of the accounting is or is not appropriate to reflect truly the professional income of Dr. Carden. The considerations which appear to me to affect any such question are to be found in the nature of the profession concerned and, indeed, the actual mode in which it is practised in a given case.
Where there is nothing analogous to a stock of vendible articles to be acquired or produced and carried by the taxpayer, where outstandings on the expenditure side do not correspond to, and are not naturally connected with, the outstandings on the earnings side, and where there is no fund of circulating capital from which income or profit must be detached for actual enjoyment, but where, on the contrary, the receipts represent in substance a reward for professional skill and personal work to which the expenditure on the other side of the account contributes only in a subsidiary or minor degree, then I think according to ordinary conceptions the receipts basis forms a fair and appropriate foundation for estimating professional income. But this is subject to one qualification. There must be continuity in the practice of the profession. To this qualification it is necessary to return. Both in Great Britain and Australia it has been a common practice to return and to assess professional incomes upon a receipt basis. There is little judicial authority dealing with the practice. But in Commissioners of Inland Revenue v Morrison [F31] , both Lord Clyde and Lord Morison appear to me to have treated the practice as well founded. The case related to a professional engineer's business. Lord Clyde said:
"In assessing the profits of such a professional business as this, one or other of two modes of computation are in use, which have, no doubt, been found alternatively convenient and appropriate according to particular circumstances. It is obvious that the usual mode which applies to the assessment of the profits of a trading business which buys and sells, or to a manufacturing business which buys raw material and makes it up and sells the finished product, would not be practically capable of application to an ordinary professional business in which the professional man markets nothing but his own services and ingathers nothing but professional fees. The two alternative modes of computation are known as the 'cash' basis mode and the 'earnings' basis mode. According to the first, the profits of the business are estimated according to the excess of the actual cash receipts during the year over the cash outlays and expenses actually disbursed or paid during the year. This mode takes no account of what are called 'outstandings,' that is, fees earned but not yet ingathered, either at the beginning or at the end of the year. According to the 'earnings' basis mode, the actual cash receipts during the year and the actual cash outlays during the year are treated in the same way as before; but, to the favourable balance thus brought out, there is added the amount of the fees earned but not yet collected at the end of the year, and then there is deducted the amount of the fees earned but not yet collected at the beginning of the year. Both modes appear to be somewhat rough and ready; but I suppose that-one year with another-they are found to work with sufficient accuracy. The first has the merit of avoiding all the trouble which the second imposes on the taxpayer in calculating the 'outstandings' on current jobs" [F32] .
Lord Morison said:
"The words 'profits and gains' are not defined in the statute. I think, however, that the word 'profits' for income tax purposes is, in general, to be understood in its natural and proper meaning and that the assessable profits are to be ascertained on the ordinary principles of commercial accounting. At the same time, profits are, in practice, given a somewhat elastic meaning, and so taxable income is in some exceptional cases arrived at on what is called the 'cash' basis which I understand reaches the amount of taxable income by ascertaining the difference between the incomings of a particular year and the actual expenditure necessary to earn them" [F33] .
For the reasons I have given I think that Dr. Carden's professional income was properly assessed upon actual receipts.
To state the case at its lowest, actual receipts formed a basis the choice of which was clearly lawful and proper. The special cases contain very little or no information about the nature of Dr. Carden's practice. If in a given medical practice there is but little certainty about the payment of fees, I should have thought that a receipts basis of accounting would alone reflect truly the income and for most professional incomes it is the appropriate. But to a great degree the question whether income of a particular kind can be properly calculated on one basis alone or upon either, must depend upon the nature of the source of income.
In the present case the commissioner properly adopted a receipts basis for the assessment of Dr. Carden's income for the year ending 30th June 1935. Having done so, there was no foundation for his alteration of that assessment and the alteration should be cancelled and the assessment restored to its former condition.
But in two respects the broken period, ending on 15th November 1935, stands upon a different footing. In the first place, the commissioner did not adopt a receipts basis. He assessed the executors upon an earnings basis for that period. In the second place, it was not a complete period forming part of a continuous practice. As Dr. Carden died during the period, the assessment which the commissioner was called upon to make was not an ordinary assessment of his income for an accounting period forming a division of time in a continuous process of derivation of income. It was a special assessment for the purpose of determining what was the income of a deceased person since the conclusion of the last regular accounting period (s. 42).
On the whole I think that it was in these circumstances open to the commissioner to adopt the earnings basis in order to ascertain the intermediate income of the deceased to his death.
The views I have expressed accord, I believe, with those contained in the judgment of the Supreme Court delivered by Napier J. upon the first case stated. Upon the second case stated the Supreme Court adhered to that judgment and answered the questions in favour of Dr. Carden's executors. The question numbered two in the first special case does not arise.
In my opinion both appeals to this court should be dismissed with costs.