Utah Development Co. v. Federal Commissioner of Taxation.
Judges:Newton J
Court:
Supreme Court of Victoria
Newton J.: These are two appeals by Utah Development Company (which I shall call ``Utah'') in respect of assessment of income tax for the years ended 31st October, 1970 and 31st October, 1972. The appeals involve the same basic questions, and were heard together.
The questions raised by the appeals may be conveniently divided into two categories, namely -
(a) Questions arising under sec. 62AA of the Income Tax Assessment Act with respect to expenditure of a capital nature by Utah upon coal preparation plants; and
(b) Questions arising under Division 10 of Part III of the Act.
The former category of questions involves much the larger amounts of tax, and it also occupied the greater part of the hearing. I shall deal with it first.
The questions arising under sec. 62AA are whether Utah is entitled to deductions under sec. 62AA(5) in respect of capital expenditure upon the construction of three coal preparation plants situated at three coal mines operated by Utah in Queensland, namely at Blackwater, Goonyella and Peak Downs. The
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Commissioner has disallowed Utah's claims to these deductions.So far as concerns the year ended 31st October, 1970, it is only expenditure upon the Blackwater preparation plant that is relevant, but the expenditure upon all three plants is relevant to the year ended 31st October, 1972. And so far as concerns the mines and preparation plants at Goonyella and Peak Downs, Utah has simply an 85 per cent interest therein, the remaining 15 per cent being held by Mitsubishi Development Pty. Ltd. Further complications arise from the existence of tax losses incurred by Utah in years prior to the year ended 31st October, 1970, and also in the year ended 31st October, 1971. But all these matters may be put to one side, for it was common ground, as I understood it, that Utah's claims under sec. 62AA in respect of the three preparation plants are correctly set out for present purposes in Exhibit ``BB'', and that these claims must be allowed in toto, if the true conclusions be -
(a) That the operations carried out by the three preparation plants are ``operations by means of which manufactured goods are derived from other goods'' (sec. 62AA(2)(a)(i)); and
(b) That the preparation plants are not ``plant... for use in mining... operations'' (sec. 62AA(3)(a)).
Counsel for Utah submitted that both (a) and (b) were established by the evidence, while counsel for the Commissioner submitted that neither was established by the evidence. These are the only controversies which I have to decide, so far as concerns the sec. 62AA questions.
In my opinion, the submissions of counsel for Utah on these matters are correct.
A great deal of very detailed oral and documentary evidence was given on behalf of Utah regarding the nature and method of operation of the coal mines at Blackwater, Goonyella and Peak Downs, and regarding the three preparation plants and their functions. None of this evidence was contradicted by evidence called on behalf of the Commissioner, and I accept the whole of it. Indeed no part of this evidence was challenged by counsel for the Commissioner, except for certain opinion evidence by Mr. Bateman regarding the degree of importance of the removal of ash content from run of mine coal by the preparation plants. But this is a matter of relatively minor importance, and if it matters, I accept Mr. Bateman's opinions on this topic, which were supported by Mr. Cudmore's evidence.
There was a conflict of evidence as to the meaning attached to the expression ``mining operations'' by persons in the coal mining industry. But this is not relevant to the evidence about the mines and the preparation plants and how they work, and I shall come to it later.
At the request of both parties I visited the Blackwater and Peak Downs mining areas and saw the mines and the preparation plants. I inspected the inside of the Blackwater preparations plant, but declined an invitation to make a similar inspection of the Peak Downs preparation plant, as I have no head for heights and I had found the inspection of the Blackwater preparation plant terrifying enough. This visit to Blackwater and Peak Downs enabled me much better to understand the evidence in the case. Counsel had agreed that I might use the visit itself as evidence, in the sense of taking in evidence with my own eyes, but as it turned out I did not obtain for myself any relevant evidence from the visit, which was additional to evidence given in Court.
Since the relevant facts relating to the physical nature and methods of operation of the coal mines and preparation plants at Blackwater, Goonyella and Peak Downs, and also the evidence about the purposes of the preparation plants, are set out in the transcript and exhibits for all to read, it will, I trust, be sufficient if I set out a relatively brief and simplified summary of these matters in this judgment.
The Blackwater, Goonyella and Peak Downs mines have come into operation fairly recently, the first to begin being Blackwater in about 1968, Goonyella following in 1971 and Peak Downs in 1972.
At each of the Blackwater, Goonyella and Peak Downs mines coal is mined by open cut methods from a number of pits. There is situated at each mine a coal preparation plant, to which coal (i.e. run of mine coal) is brought in trucks from the mining pits.
The purpose of the preparation plant at each mine is to produce from the run of mine coal a coal which is suitable for making coke for use in iron ore blast furnaces, that is to produce metallurgical coking coal. Utah sells the metallurgical coking coal to purchasers in Japan and in Europe pursuant to contracts
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which require the coal to conform to certain specifications, or minimum specifications, as to moisture content, volatile matter, ash content, sulphur content, heating value, free swelling index and size. The purchasers buy the coal for the purpose of making it into coke for use in iron ore blast furnaces, and conformity with the contract specification is necessary if that purpose is to be satisfactorily achieved. The contracts also, either expressly or by implication, require the coal to be substantially homogeneous, that is to have all parts of substantially the same quality, and this too is a necessary characteristic if it is to be used for making metallurgical coke.The run of mine coal from each mine would not itself meet all the specifications in the contracts, and it would not be suitable for use as metallurgical coking coal, although it could be used as steaming coke after simple crushing. In particular, generally speaking the ash content of the run of mine coal is too high, the sulphur content is too high and the free swelling index and heating values are too low. Free swelling index is a measure of the strength of the coal and is of great importance, because coke in a blast furnace must be strong enough to support the burden of iron ore and limestone.
Coal in general is a very heterogeneous and complex material, and the run of mine coal at the three mines is itself a very heterogeneous and complex material. Coal as a substance includes a variety of different entities or macerals, each of which has different properties. A single piece of run of mine coal can, and almost invariably does consist of several entities or macerals, which are physically joined together in it. The blend of these entities in the run of mine coal from each of the three mines now in question is such that the coal lacks the necessary qualities for metallurgical coking coal, as earlier stated.
Essentially what each of the preparation plants does is to break up the run of mine coal into small pieces so as to separate to a considerable extent the different entities of which the coal is composed, although it is impossible to do this 100 per cent completely, and the plant then concentrates as a new coal entities taken from the run of mine coal, which in combination will constitute a metallurgical coking coal, possessing the requisite qualities. Thus the entities of the new coal produce or constitute a coal which has, for example, a reduced ash and sulphur content as compared with the run of mine coal, and a greater strength, the strength depending on a proper combination in the new coal of reactive entities and inert entities. The residues of the run of mine coal are rejected, or at all events placed to one side as a separate coal or coals; these residues have some heating value, and could be used for power generation, as Mr. Bateman explained in his evidence, although so far they have not been so used; however, negotiations for their use in this way have been and are taking place. At Blackwater the metallurgical coking coal produced by the preparation plant is equal to about 65 per cent of the run of mine coal on an air dried weight basis, and at Goonyella and Peak Downs the proportion is about 75 per cent. I should say that I have taken my description of the essential functions of the preparation plants principally from Mr. Cudmore's evidence.
The operations by which the coal preparation plants carry out the functions just described involve very expensive equipment, some of which is of large size, and complicated and sophisticated technical processes. Each plant consists of a large, high building, together with adjacent ancillary plant. The Peak Downs preparation plant building, for example, is about 100 feet cube, with five storeys. The plants were very expensive, the approximate total cost of the Peak Downs plant (which was the most expensive) being over $12,000,000. Photographs of the plants and of many of their items of equipment are included in Exhibit ``A''.
The three preparation plants operate in substantially the same way, although there are minor differences. I shall give a short and simplified description of the process.
Run of mine coal, which consists of pieces of coal up to a size of 4 feet, is screened and broken, so that it is reduced to pieces not exceeding about 1¼", that is pieces from 1¼" to almost nil. Coal which is too hard to break would not be suitable for metallurgical coking coal and is rejected at this stage. The coal reduced to pieces of 1¼" or less is then placed on a stockpile from which it is taken by conveyor into the preparation plant building, being loaded on to the conveyor in a way which will tend to mix it up and homogenise it. In the preparation plant building the coal is mixed with water, and after that the coarser parts of the coal, that is pieces between about 1¼" and half a millimetre, are separated from the finer parts by sieve bends and
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screens. The coarse parts and the fine parts are thereafter separately dealt with.The coarse parts are mixed with a heavy medium of magnetite and water, and are then pumped under high pressure to cycloids (i.e. heavy medium cycloids), where a separation on a specific gravity basis takes place between the parts suitable for metallurgical coking coal and the parts not so suitable. The suitable parts, that is the product coarse coal, which are the lighter, then leave the top of the cycloids and are drained and rinsed of magnetite, and are dried in high speed centrifuges. They are then mixed with the product fine coal, to which I shall come in a moment. The unsuitable or reject parts of the coarse feed coal leave the bottom of the cycloids and are then drained and rinsed and conveyed to a large bin, whence they are taken by truck to a disposal area. Most of the magnetite, which is a fairly expensive commodity, is recovered from both the coarse product coal and the coarse reject coal and is prepared for re-use.
The fine parts of the feed coal (i.e. half a millimetre and smaller) are pumped, after separation from the coarse parts, to desliming cyclones, where the smallest particles (which could not be economically treated for use as metallurgical coking coal) are separated from the rest, each cyclone operating as a size separator with the finer particles flowing out at the top. The remainder of the fine coal feed is then rediluted to a controlled water/solids ratio, to which is added a mixture of frothing and collecting reagents. It is then pumped to froth flotation cells where the mixture is subjected to controlled agitation and sub-aeration, which creates bubbles. The particles in the mixture which are suitable for metallurgical coking coal, namely those rich in the entity or maceral vitranite, are attracted by the bubbles and carried to the surface, whence they are collected and removed by paddles. These particles constitute the fine product coal, and they are then pumped to large vacuum disc filters, where water is removed. The fine product coal then proceeds to join the coarse product coal, as earlier stated. The fine coal feed in the froth flotation cells which is not attracted by the bubbles and carried to the surface (i.e. the fine reject coal) is removed and is ultimately pumped to fine reject ponds after a separation process by a tailings cyclone and processing of the finer parts in a thickener tank. The fine rejects from the desliming cyclones also go to the thickener tank and thence to the fine reject ponds.
The proportion of the feed which is dealt with as fine coal is between 20 per cent and 28 per cent, the proportion varying as between the three preparation plants.
The plants have equipment whereby the water used in their operations is recovered and clarified and then re-used.
After the coarse product coal and the fine product coal have been united together, they are transported by conveyor out of the preparation plant building to a radial stacker and stacked on a stockpile, whence they are loaded on to another conveyor and transported to a rail bin for loading into railway trucks for transport to the coast for export. The methods used in stacking the product coal on the stockpile and in loading it on to the conveyor to the rail bin are such as to mix the coal, thereby homogenising it. At Goonyella and Peak Downs about half the product coal is of sizes of less than ⅛th", and only 1 or 2 per cent is more than 1". There was, I think, no evidence about the sizes of the Blackwater product coal.
At several stages of the operations of each of the preparation plants samples of coal are taken, which are tested in a laboratory. In the light of these tests adjustments to the processes of the preparation plant are frequently made from the plant control room, so as to ensure that the product coal meets the required specifications, for example by altering the concentration of magnetite in the coarse coal feed to the heavy medium cycloids, or by altering the concentration of the reagents in the fine coal feed to the froth flotation cells.
At Blackwater, but not at Goonyella or Peak Downs, run of mine coal from a particular part of the mine is often added by ``bypass'' conveyor to the product coal stockpile after crushing to sizes of 1 ¼ inches maximum, without going through the preparation plant. Although this coal would not by itself meet all the contract specifications, nevertheless it is of such a quality that it can be blended with the product coal from the preparation plant so as to produce a coal which does meet the contract specifications. But of the total product coal from Blackwater never more than 20 per cent consists of this ``bypass'' coal. I mention this matter of the Blackwater ``bypass'' simply for the sake of completeness. It was not suggested
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by counsel for the Commissioner that it made any difference to Utah's claim under sec. 62AA with respect to the Blackwater preparation plant as compared with its claims under sec. 62AA with respect to the Goonyella and Peak Downs plants.The production rates of the three plants are approximately 4 million tons per annum for Blackwater, approximately 4.5 million tons per annum for Goonyella, and approximately 5 million tons per annum for Peak Downs. About 30 to 35 men, who work in three shifts per day for five days a week, are employed in operating each preparation plant, and a further 25 men or thereabouts are employed in maintenance.
I am satisfied that the operations carried out by each of the three preparation plants are ``operations by means of which manufactured goods'' (i.e. the product coal, suitable for making metallurgical coke) ``are derived from other goods'' (i.e. the run of mine coal) within the meaning of sec. 62AA(2)(a)(i). The preparation plants produce from run of mine coal, the properties or qualities of which render it quite unsuitable for use as metallurgical coking coal, a coal of significantly different properties or qualities, which is suitable for use as metallurgical coking coal. This result is achieved by a highly technical process, the use of which involves human labour and also numerous items of plant, equipment and machinery, some of which are very large, many of which are complicated and sophisticated, and all of which are housed in or situated near a large factory-like building. The meaning of the words ``manufacture'' and ``manufactured goods derived from other goods'' and like expressions, has on many occasions, been considered by the Courts. It is, I trust, sufficient to say that I believe that my conclusion on this aspect of the case is supported by authorities such as
M.P. Metals Pty. Ltd. v. F.C. of T. (1967) 117 C.L.R. 631 (where numerous earlier authorities are referred to), and
Ready Mixed Concrete (W.A.) Pty. Ltd. v. F.C. of T. 71 ATC 4107; (1971) 45 A.L.J.R. 293; see too
F.C. of T. v. I.C.I. Australia Ltd. 71 ATC 4253 at p. 4267, 127 C.L.R. 529 at pp. 555-6 per Walsh J., and 72 ATC 4213 at p. 4223, 127 C.L.R. 529 at p. 574 per Menzies J.;
Samuel McCausland v. Minister of Commerce (1956) Northern Ireland Reports 36:
R. v. York Marble, Tile and Terrazzo Ltd. (1968) S.C.R. (Canada) 140; and
R. v. Canadian Pacific Railway Co. (1971) 19 D.I.R.(3rd) 97.
I am satisfied that the preparation plants are not ``plant.... for use in mining... operations'' within the meaning of sec. 62AA(3)(a).
It is true that each of the preparation plants is situated topographically in the same area as the open cut mine pits, from which its feed coal (i.e. run of mine coal) is derived; and it is clear from Mr. Sutherland's evidence that the manager of each mine has the preparation plant under his ultimate control as well as everything else at the mine.
But the relevant tests of where mining operations begin and end are set out in the joint judgment of Barwick C.J., McTiernan and Menzies JJ. in
F.C. of T. v. Broken Hill Pty. Co. Ltd. 69 ATC 4028 at pp. 4030-31; (1969) 120 C.L.R. 240 at pp. 272-4. Their Honours were dealing with a different section from sec. 62AA, but in my opinion what they said was equally applicable to sec. 62AA(3)(a), and counsel on both sides accepted that this was so. I shall set out the relevant passage from the judgment -
``Kitto J. took a very broad view of what falls within the description of `mining operations' His Honour said -
- This expression is wider than `the working of a mining property'. It embraces not only the extraction of mineral from the soil, but also all operations pertaining to mining:
Parker v. F.C. of T. (1953) 90 C.L.R. 489 at p. 494. Thus it comprehends more than mining in the narrow sense which imports the detaching of lumps of material from the position in which in a state of nature they form part of the soil. It extends to any work done on a mineral-bearing property in preparation for or as ancillary to the actual winning of the mineral (as distinguished from work for the purpose of ascertaining whether it is worthwhile to undertake mining at all):
F.C. of T. v. Broken Hill South Ltd. (1941) 65 C.L.R. 150 at pp. 153, 156, 159, 161. Likewise it extends to any work done on the property subsequently to the winning of the mineral (e.g., transporting, crushing, sluicing and screening) for the purpose of completing the recovery of the desired end product of the whole activity:
F.C. of T. v. Henderson (1943) 68 C.L.R. 29 at pp. 45, 50. In each case it is the close association of the work with the mining proper that gives it the character of operations pertaining to mining'.
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- We agree entirely with his Honour's view that `mining operations' covers `work done on a mineral-bearing property in preparation for, or as ancillary to, the actual winning of the mineral', but with regard to the statement, that `it extends to any work done on the property subsequently to the winning of the mineral (e.g., transporting, crushing, sluicing and screening) for the purpose of completing the recovery of the desired end product of the whole activity', we have a reservation. We do not doubt that to separate what it is sought to obtain by mining from that which is mined with it, e.g., the separation of gold from quartz by crushing etc., or the separation of tin from dirt by sluicing, is part of a `mining operation' but we would not extend the conception to what is merely the treatment of the mineral recovered for the purpose of the better utilization of that mineral. Thus to crush bluestone in a stone crushing plant so that it can be used for road making, or to fashion sandstone so that it becomes suitable for building a wall or a town hall is not, as we see it, a mining operation. Nor would the cutting of diamonds or opals which have been recovered by mining operations fall within the description of mining operations. In F.C. of T. v. Henderson (1943) 68 C.L.R. 29, it was decided that to obtain gold from gold-bearing material i.e., slum dumps, by sluicing, screening, filtering and chemical treatment was a mining operation and this, of course, we accept. The reason for so deciding, however, has no application to a process that does no more than either reduce in size lumps of ironstone of manageable size taken from the earth, or, to increase the size of small fragments of ore taken from the earth in order that the ore which has been mined can be conveniently carried away from the mine and utilized in steel making. In Henderson's case the object of the taxpayer's mining operation was to obtain gold and those operations comprehended all the steps in the recovery of gold from the slum dumps; here the object of the taxpayer's mining operations is to obtain iron ore - the end product - and those operations comprehend all the steps taken to do so, but once the iron ore is obtained in manageable lumps then its further treatment, either to reduce or increase its size so that it can be conveniently transported from the mine and better utilized in industry, forms no part of the mining operation. In the same way we would not regard the converting of brown coal into briquettes as part of a mining operation; nor would we regard the treatment in a refinery of naturally occurring hydro-carbon in a free state as part of the operation of mining for petroleum. The mining operation in the last-mentioned instance would finish with what is referred to in sec. 122AA as the `obtaining' of petroleum as defined. Accordingly, we would not treat `the whole activity' referred to in the passage from his Honour's judgment just quoted as extending to the disposal of the product mined, and because we think `the end product' of the mining activity in this case is iron ore to be taken away from the mining property, we consider that `mining operations' end when the iron ore is in a state suitable for this. The taking away from the mining property of ore which has been mined, whether that be done by the mining company or by someone else, is a step subsequent to the conclusion of the mining operations.''
Applying the tests formulated by their Honours in this passage, it appears to me that the preparation plants, although they may be said to be situated on the mining properties, are not for use ``in mining operations''. In my opinion what Utah seeks to obtain by mining at each of the three mines is the run of mine coal which is extracted from the open cut pits. I would characterise the operations of the preparation plants as treatment of what is mined for the purpose of its better utilisation. Indeed it would in my view be quite wrong to say that what Utah seeks to obtain by mining is the metallurgical coking coal, which is later produced by the preparation plants from the run of mine coal. For the metallurgical coking coal as such simply does not exist in the mine. It is only by the separation and reconstruction of entities or macerals found in the run of mine coal, which is effected by the complex and sophisticated operations of the preparation plants, that the metallurgical coking coal is brought into existence. It may be remarked that the operations of the preparation plants in their fundamentals bear a good deal of resemblance to the operations of a simple fractional distillation oil refinery; thus in each case there is a separation by technical processes of what is brought out of the ground into different components, each of which has some value: it will be recalled that both the coarse
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and fine reject coals from the preparation plants have heating values and could be used for power generation. As will have been seen in the B.H.P. case (supra) their Honours expressly stated that they would not regard the treatment in a refinery of naturally occurring hydro-carbons in a free state as part of the operation of mining for petroleum. It may also perhaps be of some relevance in the present case that the run of mine coal would have commercial value as a steaming coal if it were never put into the preparation plants.I wish to add that if I were asked to say whether the preparation plants were plant ``for use in mining operations'' within the meaning of sec. 62AA(3)(a), treating that expression as having its ordinary or popular meaning as a piece of English language, and without any reference to reported decisions, I should have no hesitation in saying that the preparation plants were not plant ``for use in mining operations''. They play no part in the winning of the coal from the ground; their function is to manufacture from coal already mined, which is not suitable for use as metallurgical coking coal, another coal of different properties or qualities, which is suitable for that use; and the circumstance that each is situated topographically in the same area as the mine pits from which its feed coal is taken appears to me to be logically irrelevant. It may here be observed that it was established by the evidence that in New South Wales, the United Kingdom, the United States, and India, it is not uncommon for preparation plants of a general similarity to the Utah preparation plants now in question, to be situated away from the mines where their feed coal is extracted.
Evidence was called on behalf of the Commissioner of Taxation with a view to showing that in the vernacular of the coal industry the expression ``mining operations'' would include, so far as concerns Blackwater, Goonyella and Peak Downs, both the actual winning of the coal from the open cut pits and the operations of the preparation plants. This evidence was objected to as inadmissible by counsel for Utah. I did not rule upon the objection, but took the evidence subject to objection. I also allowed counsel for Utah, without prejudice to their objection, to call evidence on behalf of Utah with a view to showing that in the vernacular of the coal industry the expression ``mining operations'' would not include the operations of the preparation plants at Blackwater, Goonyella and Peak Downs.
Having heard the evidence called by both sides upon this issue, I am satisfied that nobody in the coal industry would regard a preparation plant which was situated away from the mining properties whence its feed coal was derived, for example at a steelworks, as used in ``mining operations''.
On the other hand I am also satisfied that a substantial number of persons in the coal industry (including the witnesses called by the Commissioner) would regard the expression ``mining operations'', if they took time to think about it, as including the operations of any coal preparation plant which was situated at the mining property from which its feed coal was taken and the operations of which were under the same managerial control as the operations involved in the actual winning of the coal; in the view of such persons the Blackwater, Goonyella and Peak Downs preparation plants are ``for use in mining operations''. Such persons regard practically all activities on a mining property, which are under the same managerial control as the actual winning of the coal, as included in the term ``mining operations''.
However, I am also satisfied that a substantial number of other persons in the coal industry (including the witnesses called by Utah on this issue) would take a contrary view, and would regard only the operations at Blackwater, Goonyella and Peak Downs which are directed to the actual winning of the run of mine coal from the open cut mines as ``mining operations'', to the exclusion of the operations of the preparation plants. In addition, I am satisfied that the expression ``mining operations'', unlike the word ``mining'', is not of frequent use among persons in the coal industry, and that they all tend to use it, insofar as they use it at all, in different senses at different times. An example of this latter is to be found in the evidence of Professor Thomas, who was called by the Commissioner, and who, when describing in cross-examination a typical visit to a mine, said quite spontaneously, ``You do the underground operations, or mining operations while the morning shift is going on and then after the change in shift you go and have a look and see how the mill operates and discuss recoveries'': (emphasis is mine).
My overall or ultimate conclusion is that there is no established usage in the vernacular of the coal industry according to which the preparation plants at Blackwater, Goonyella and Peak Downs would be regarded as used in
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``mining operations''; there is simply a difference of opinion on the matter. Hence, even if the evidence upon this matter was admissible, it is of little or no help in deciding whether the preparation plants are ``plant for use in mining operations'' within the meaning of sec. 62AA(3)(a).I therefore find it unnecessary to decide whether the evidence was admissible. Relevant authorities appear to me to include F.C. of T. v. I.C.I. Australia Ltd. (supra) 71 ATC 4253 at pp. 4261-3 per Walsh J. (where earlier relevant authorities are discussed), and also 72 ATC 4213 at pp. 4216-8 per Barwick C.J. and at pp. 4225-8 per Gibbs J.;
The Australian Gas Light Co. v. The Valuer-General (1940) 40 S.R. (N.S.W.) 126 at p. 137 per Jordan C.J.; Craies on Statute Law 7th ed. (1971) pp. 162-165; and Maxwell on Interpretation of Statutes 12th ed. (1969) pp. 28 and 81-85. If the evidence was admissible, and even if it had established a usage in the vernacular of the coal industry according to which the three preparation plants in question would be regarded as being ``for use in mining operations'', then a further question would have arisen whether I was entitled to act on the evidence, if I am right in thinking that an application of the tests set out in the B.H.P. case (supra) 69 ATC 4028 at pp. 4030-1; 120 C.L.R. 240 at pp. 272-4 requires the conclusion that the preparation plants are not ``for use in mining operations''.
I now turn to the questions arising under Division 10 of Part III of the Income Tax Assessment Act. These questions relate to two payments. I shall set out the facts relating to each payment in turn, as they appear to me from the evidence adduced on behalf of Utah. This evidence was not challenged by the Commissioner. However, it was presented in a form which I found somewhat confusing.
The first payment is a payment of $63,500 which was made by Utah and Mitsubishi Development Pty. Ltd. (which I shall call ``Mitsubishi'') on 23rd February, 1970 to Eelin Margaret Williams (whom I shall call ``Mrs. Williams''). Utah itself bore 85 per cent of this payment, that is $53,975, and it claims that this sum of $53,975 is ``allowable capital expenditure'' within the meaning of sec. 122A(1) of the Income Tax Assessment Act.
I shall now explain the circumstances, as I understand them, under which the $63,500 came to be paid by Utah and Mitsubishi to Mrs. Williams.
On and prior to 23rd February, 1970 Utah and Mitsubishi held an Authority to Prospect for coal over lands in Queensland, which included the land that later became the Goonyella Mines. This Authority to Prospect had been issued pursuant to cl. 2 of Part II of the Agreement between the State of Queensland, and Utah and Mitsubishi, which was made on 28th February, 1969 and the terms of which, subject to later and presently immaterial amendments, are set out in the Schedule to the Central Queensland Coal Associates Agreement Act 1968. By that Act the agreement (which I shall call ``the Queensland Statutory Agreement'') has the force of law. The Authority to Prospect in substance conferred the right to prospect for coal, but not to mine: see the form set out in the Second Schedule to the Queensland Statutory Agreement, and especially cl. 5 thereof. Under cl. 1(1) of Part III of the Queensland Statutory Agreement Utah and Mitsubishi were in terms entitled to be granted on request a Special Coal Mining Lease over any of the lands which were subject to the Authority to Prospect, subject to certain restrictions set out in cl. 2 as to number of Leases granted and the total area thereof; these restrictions are not material to the present question. A Special Coal Mining Lease could confer, and no doubt might reasonably be expected to confer, the right to mine for coal, subject, so far as presently material, to cl. 6 of Part III of the Queensland Statutory Agreement, which I set out later in full: see cl. 3 and 4 of Part III of the Queensland Statutory Agreement, and the form set out in the Third Schedule thereto. Reference may here be made to the recent decision of the Privy Council in
Cudgen Rutile (No. 2) Pty. Ltd. v. Chalk (1974) 49 A.L.J.R. 22; but it is unnecessary for me to consider what bearing, if any, that decision has upon cl. 1 of Part III of the Queensland Statutory Agreement.
It appears that prior to February, 1970 Utah and Mitsubishi had decided to obtain a Special Coal Mining Lease pursuant to cl. 1(1) of Part III of the Queensland Statutory Agreement over the land where the Goonyella mines now are. Indeed by a contract dated 20th January, 1969 (Exhibit `E2'), Utah and Mitsubishi had agreed to sell coking coal from the Goonyella mines to Yawata Iron and Steel Co. on the terms and conditions therein set out: compare cl. 6 of Part I of the Queensland Statutory Agreement.
Prior to 23rd February, 1970 Utah and Mitsubishi had carried out works at the Goonyella mining property for the purpose of
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later conducting open cut coal mining thereon. These works as they stood at 23rd February, 1970 included the following -- (a) The western extremity of the mining open cuts, or L.O.X. (limit of oxidation) line, had been determined by drilling, and the actual pit layouts or dimensions had been determined.
- (b) About 55% of the work involved in clearing vegetation from the sites of the open cut pits, and from the adjacent land which was to be used for accommodation barracks, administration building, warehouse and the like, and also for the preparation plant, had been completed.
- (c) About 50% of the work involved in constructing an access road from the Peak Downs Highway had been completed.
- (d) Work had commenced, and had made varying degrees of progress, upon inter alia the provision of water and electricity to the mining property, and the construction of accommodation barracks and assay laboratory; and the vehicle service shop on the property was almost completed.
These works at the Goonyella mining property for the purpose of conducting open cut mining operations were all completed by the end of February, 1971.
A Special Coal Mining Lease of the Goonyella mines was not in fact granted until 1971. Mining operations first began in 1971 (as Mr. Bateman stated in his evidence), and they have continued ever since.
Clause 6 of Part III of the Queensland Statutory Agreement is as follows -
``6(1) The grant of a Special Coal Mining Lease does not give the Companies" (i.e. Utah and Mitsubishi) "the right to use or disturb the surface of the land comprised in such Special Coal Mining Lease except as provided in this Clause.
(2) In an application for a Special Coal Mining Lease, the Companies shall designate the surface thereof required by the Companies for the purposes of such lease. Such application shall be accompanied by a proper description and plan of the lands over which such surface rights are required.
In like manner, the Companies may from time to time apply to the Minister for surface rights over additional lands comprised in such Special Coal Mining Lease.
(3) In respect of any land which is private land within the meaning of The Mining on Private Land Acts, 1909 to 1965, which is desired to be included at any time in a Special Coal Mining Lease, the Companies shall fully comply with the provisions of such Acts relating to compensation for deprivation of the possession of such surface or of any part of such surface as is required and for damage to such surface or to any part thereof or damage to improvements thereon but shall not be required to apply for or acquire a permit to enter in respect of any such land within the Special Coal Mining Lease.
(4) In respect of land comprised in a reserve the Companies shall not under the Special Coal Mining Lease disturb the surface of such land (unless the Companies are already possessed of surface rights in relation thereto) or do any act which affects or disturbs or is likely to affect or disturb the enjoyment of such surface by persons entitled thereto except in accordance with a consent of the Governor in Council first obtained. In considering whether to grant or refuse a consent the Governor in Council shall have regard to the views of the person or authority who has the care and management of the reserve in question but the grant or refusal of such consent shall remain in the discretion of the Governor in Council. The Governor in Council may restrict his consent to a part or parts of the reserve in question and may subject his consent to such conditions as he deems proper.
If the Companies under a Special Coal Mining Lease disturb the surface of the land comprised in a reserve or do any act which affects or disturbs the enjoyment of such surface by persons entitled thereto except in accordance with the consent of the Governor in Council, the Companies shall pay compensation to the person or authority who has the care or management of such reserve in respect of damage so caused and such compensation may be recovered by such person or authority as for a debt in a Court of competent jurisdiction.
(5) If the Companies wish to use or disturb the surface of Crown land (other than a reserve) comprised in a Special Coal Mining Lease, the Companies shall give one
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(1) month's notice thereof to the holder or occupier of such lands including the Crown where such lands are not the subject of any tenure and shall compensate such holder or occupier for any damage suffered by him as a result of such use and disturbance of the surface. The Companies shall also make provisions satisfactory to the Minister for rights-of-way over such surface for the purpose of moving stock and for other agricultural or grazing purposes. Upon the Minister being satisfied that the Companies reasonably require such surface for the purpose of this Agreement and that the holder or occupier of such land has been properly notified and compensated and that satisfactory provision has been made for rights-of-way, then the Minister shall cause the grant of such surface rights to be noted on the Special Coal Mining Lease. The Companies shall not interfere with any rights-of-way except in accordance with a proposal approved by the Minister in writing.(6) If the Companies wish to use or disturb the surface of any Crown land subject to the Brigalow Scheme as provided in Part VIII of this Agreement, the Companies shall compensate the State as provided in such Part.''
Part of the land at Goonyella over which Utah and Mitsubishi in and prior to February, 1970, intended to obtain a Special Coal Mining Lease, and over which in 1971 they in fact obtained such a lease, was itself part of an area of about 50,000 acres held by Mrs. Williams under two grazing leases from the Crown. The part of the land subject to Mrs. Williams' leasehold rights which came to be included in the Special Coal Mining Lease was of an area of about 3,723 acres, and the land subject to the Special Coal Mining Lease ran right through Mrs. Williams' 50,000 acres so as to cut it into two sections, as is shown by the map, Exhibit `GG'.
Utah and Mitsubishi therefore entered into an agreements with Mrs. Williams, which bears the date 27th February, 1970, Exhibit `MM'. The terms of this agreement are rather lengthy and complicated, but for the present purposes their general effect may be summarized in a simplified form as follows: - Mrs. Williams was to be paid $63,500, (a) as compensation for disturbance of the surface area of so much of her land (i.e. in fact about 3,723 acres) as was to be included in the Special Coal Mining Lease, and (b) as consideration for her surrender to the Crown of her leasehold interest in land which later proved to be of about 798 acres in all, and which adjoined the 3,723 acres on the western boundary of the latter: see the maps Exhibits `GG' and `HH'. (In fact the precise acreages involved had not been ascertained at the time of the agreement, which provided for adjustment of the amount of $63,500 following a survey of all the lands in question, and on the basis that the total amount payable to Mrs. Williams should be $10 per acre plus $19,500 in respect of loss of improvements. The survey has since been carried out, and the acreages of 3,723 and 798, which I have stated, are based on it, so that a further sum is owing to Mrs. Williams, the figure of $63,500 having been based on an assumed acreage of only about 4,394 in all.) The agreement also provided for the construction of access roads across the lands in question for the benefit of Mrs. Williams' remaining lands. Mrs. Williams remained entitled to her leasehold interest in the 3,723 acres, subject only to rights over the surface thereof, which were given to Utah and Mitsubishi by the agreement.
The reason why the agreement provided for Mrs. Williams to surrender the 798 acres to the Crown was that Utah and Mitsubishi intended themselves then to obtain a special lease of this land from the Crown and to use it for haul roads, water storage in dams, spoil piles, electricity power line and water pipeline, so that the 3,723 acres in the Special Coal Mining Lease could be mined right up to its western boundary. In fact, although Mrs. Williams surrendered the 798 acres to the Crown, in the end no special lease of the 798 acres was granted by the Crown to Utah and Mitsubishi; instead the 798 acres were included in a Special Coal Mining Lease granted by the Crown to Thiess, Peabody Mitsui Pty. Ltd. However, later an agreement was made with the latter company by Utah and Mitsubishi under which Utah and Mitsubishi have the right to use the 798 acres for haul loads and the other purposes originally intended.
The final result was that the 3,723 acres is used by Utah and Mitsubishi for mining; and of the 798 acres about 29 acres are used for access road, about 13 acres for water storage, about 5 acres for water pipeline, about 9 acres for power line, about 40 acres for haul roads, about 28 acres for ramps to mine pit, and the balance is not required for mining purposes, although I would infer that it, or part
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of it, in the future may be used for spoil piles or the like: see Folio 73 of Exhibit `CC', which however does not appear to have had regard to the final survey acreages.Although the agreement with Mrs. Williams bears the date 27th February, 1970, the payment of the $63,500 was in fact made to Mrs. Williams on 23rd February, 1970 as earlier stated.
The second of the two payments to which the questions under Division 10 of Part III of the Act relate is a payment of $160,000, which was made by Utah and Mitsubishi to Cherwell Pty. Ltd., pursuant to an agreement dated 17th March, 1971 (Exhibit `NN'), as to $1,000 on 23rd March, 1971 and as to the balance of $159,000 on 11th June, 1971. Utah bore 85% of this payment of $160,000, that is $136,000. In addition, certain stamp duties and registration fees were payable in respect of the transaction with Cherwell Pty. Ltd. (which I shall call ``Cherwell''), so that the total expenditure by Utah was $137,500: see Exhibit `BB'. Utah claims that this sum of $137,500 was ``allowable capital expenditure'' within the meaning of sec. 122A(1) of the Income Tax Assessment Act.
I shall now explain the circumstances, as I understand them, of the transaction between Utah and Mitsubishi, and Cherwell, in consequence of which Utah incurred this expenditure of $137,500.
The Authority to Prospect for coal, which was held by Utah and Mitsubishi as earlier stated pursuant to cl. 2 of Part II of the Queensland Statutory Agreement, included the land which later became the Peak Downs mines.
It appears that prior to 17th March, 1971 Utah and Mitsubishi had decided to obtain a Special Coal Mining Lease pursuant to cl. 1(1) of Part III of the Queensland Statutory Agreement over the land where the Peak Downs mines now are. Indeed the contract dated 20th January, 1969 (Exhibit `E2') earlier mentioned also provided for sales of coking coal from the Peak Downs area, subject to feasibility estimates being confirmed.
Prior to 17th March, 1971 Utah and Mitsubishi had carried out works at the Peak Downs mining property for the purpose of later conducting open cut coal mining thereon. These works, as they stood at 17th March, 1971, included the following -
- (a) The western extremity of the mining open cuts, or L.O.X. line, had been determined by drilling, and the actual pit layouts or dimensions had been determined.
- (b) Work had begun, and had made varying degrees of progress, upon inter alia the site for the erection of the dragline used to remove overburden; site preparation, including roads and drainage; the administration and accommodation barracks; vehicle service shop; water supply and sewerage; and electricity supply.
These works at the Peak Downs mining property were all completed by April, 1972.
No Special Coal Mining Lease of the Peak Downs mines has even now been granted to Utah and Mitsubishi. But by a letter dated 4th July, 1972 from Utah to the Under Secretary of the Queensland Department of Mines (Part of Exhibit `Z') application was made for such a lease, the total area applied for being 50,719 acres, with immediate surface rights over 15,191 acres. And mining began at Peak Downs in 1972 (as Mr. Bateman stated in his evidence), and has continued ever since. I would infer that the mining has been confined to the 15,191 acres, over which immediate surface rights were sought by the said letter dated 4th July, 1972, although the evidence does not make this clear.
Cherwell was the holder of a Crown leasehold interest over a large area of land, the eastern part of which included about 13,488 acres of the said 15,191 acres, and also included portion of the balance of the said 50,719 acres, and also included some further land further east: see the said letter dated 4th July, 1972; the maps Exhibits `JJ' and `KK'; and Mr. Sutherland's evidence at Transcript pages 454-5.
By the agreement earlier mentioned dated 17th March, 1971 between Cherwell of the one part and Utah and Mitsubishi of the other part Cherwell in effect sold to Utah and Mitsubishi approximately 32,300 acres of its leasehold land for the sum of $160,000. It is unnecessary to set out the terms of this agreement in detail. In substance the agreement provided, so far as presently material, for the surrender of the 32,300 acres by Cherwell to the Crown, and for the grant by the Crown of a Special Lease over that land to Utah and Mitsubishi as tenants in common in the proportions of 85% and 15% respectively. The 32,300 acres included the 13,488 acres, which was included in the 15,191
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acres over which Utah and Mitsubishi later applied for surface rights as aforesaid, and also other land which was included in the balance of the 50,719 acres earlier mentioned (the said 15,191 acres and the said other land being the land coloured yellow on the map Exhibit `JJ'), and also additional land both to the east and to the west of those lands (being the lands coloured green on the map, Exhibit `JJ'). As earlier stated, the $160,000 was paid by Utah and Mitsubishi to Cherwell by a deposit of $1,000 on 23rd March, 1971 and by payment of the balance of $159,000 on 11th June, 1971. Stamp duties, registration fees and the like were payable in respect of the transaction, as earlier indicated. Cherwell duly surrendered to the Crown its leasehold interest in the 32,300 acres, and the grant of a special lease there of to Utah and Mitsubishi has been approved by the Crown: see the correspondence, Exhibit `OO'; the said letter dated 4th July, 1972; and Mr. Parer's evidence at Transcript pages 480-481.The situation as to the intended use of the 32,300 acres acquired from Cherwell is as follows, as I understand the evidence -
- (a) 13,488 acres thereof, being part of the land coloured yellow on the map, Exhibit `JJ', to the west of the interrupted line running through the whole of the land coloured yellow, is part of the 15,191 acres over which Utah and Mitsubishi applied for immediate surface rights by the said letter dated 4th July, 1972, and on which mining has been in progress since 1972.
- (b) A further part thereof, being the part of the said land coloured yellow on the map, Exhibit `JJ', to the east of the interrupted line running through the whole of the land coloured yellow, is included in the 50,719 acres for which a Special Coal Mining Lease was applied for by the said letter dated 4th July, 1972. This land, as I would infer, is not at present used for mining, but will be so used in the future, after an application has been made for surface rights over it.
- (c) A further part thereof, being the area of land coloured green on the map, Exhibit `JJ', to the west of the land coloured yellow is used for spoil piles, haul roads, access road and the like. In addition this land includes the accommodation barracks, administration building, airstrip, railway loop, water pipeline, water storage, electricity power line, industrial plant (other than the preparation plant), and the preparation plant itself including its slime ponds: see the plan Exhibit `LL', and also the plan Exhibit `KK'.
- (d) The balance thereof, being the land coloured green on the map, Exhibit `JJ', to the east of the land coloured yellow, has been, or is to be, exchanged for Crown leasehold lands belonging to other persons, which are included in the 50,719 acres for which a Special Coal Mining Lease was applied for by the said letter dated 4th July, 1972. The owners of these other lands will therefore not have to be paid compensation for disturbance of the surface of those lands: see the letter dated 17th March, 1971 from Utah's Brisbane solicitors to the Scretary, Land Administration Commission, and the reply thereto dated 1st April, 1971, (Exhibit `OO'), the said letter dated 4th July, 1972, and Mr. Parer's evidence at Transcript pages 476-478.
One important consequence of the purchase of the 32,300 acres from Cherwell was that Utah and Mitsubishi did not, and will not, have to pay compensation to Cherwell for the disturbance of the surface of the part of the 32,300 acres to be included in the Special Coal Mining Lease which has been applied for, or for the consequential severance from the rest of Cherwell's land of the land coloured green on the map, Exhibit `JJ', to the east of the land coloured yellow.
Utah claims that in each of the years ended 30th October, 1971 and 30th October, 1972 a deduction should have been allowed under sec. 122D of $3,855 in respect of Utah's share (i.e. $53,975) of the payment of $63,500 by Utah and Mitsubishi to Mrs. Williams, and of $9,822 in respect of Utah's share (i.e. $137,500) of the payment of $160,000, plus stamp duties and registration fees, pursuant to the agreement between Utah and Mitsubishi and Cherwell: see Exhibit `BB'. The Commissioner did not challenge the calculations upon which these figures are based. His contention is simply that neither the $53,975 nor the $137,500 were ``allowable capital expenditure'' within the meaning of sec. 122A(1).
Utah's contention is that the sums of $53,975 and $137,500 were ``expenditure in carrying on prescribed mining operations'' within the meaning of sec. 122A(1)(a).
The expression ``prescribed mining operations'' is defined in sec. 122(1) as meaning, ``mining operations on a mining property in Australia for the extraction of minerals, other than petroleum, from their
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natural site, being operations carried on for the purpose of gaining or producing assessable income''.Hence for the purposes of the present case the question for decision is whether the two sums in question represented ``expenditure in carrying on mining operations on a mining property... for the extraction of minerals... from their natural site, being operations carried on for the purpose of gaining or producing assessable income''.
I do not propose to attempt a detailed analysis of these words. I shall simply state the reasons which have led me to the conclusion that the two sums of $53,975 and $137,500 do not fall within them.
In my opinion, these two sums were each of them spent not in carrying on mining operations upon a mining property for the extraction of minerals from their natural site, but for the purpose of acquiring a mining property or for the purpose of acquiring the right to use a property as a mining property. As to what constitutes a ``mining property'', see F.C. of T. v. Broken Hill Pty. Co. Ltd. (supra) 69 ATC 4028 at pp. 4032-4033; 120 C.L.R. 240 at pp. 245-6 per Kitto J.
Thus by the payment of $63,500 to Mrs. Williams Utah and Mitsubishi satisfied a condition imposed by cl. 6(5) of Part III of the Queensland Statutory Agreement if Utah and Mitsubishi were to use the part of Mrs. Williams' land comprised in the Goonyella Special Coal Mining Lease as a mining property, namely that they compensate her for surface damage to that land; and in addition by that payment Utah and Mitsubishi intended to obtain, and in the end did obtain, the use for purposes connected with their mining operations of part of Mrs. Williams' land which adjoined the Goonyella Special Coal Mining Lease on the west: this part of Mrs. Williams' land may, I think, be regarded as part of the Goonyella ``mining property'': see again the B.H.P. case (supra) 69 ATC 4028 at pp. 4032-4033; 120 C.L.R. 240 at pp. 245-6.
By the payment of $160,000 to Cherwell Utah and Mitsubishi acquired part of the land over which the Peak Downs Special Coal Mining Lease is to be granted, and also land to the west to be used for purposes connected with the Peak Downs mining operations, and also land to the east for the purpose of exchanging that land for other lands elsewhere, which were required for mining; in addition by acquiring the first and third of these categories of the Cherwell lands, Utah and Mitsubishi avoided the necessity of making compensation payments to Cherwell under cl. 6(5) of Part III of the Queensland Statutory Agreement as a condition of using the Cherwell part of the land comprised in the Peak Downs Special Coal Mining Lease as a mining property.
My conclusion that payments of this character are not ``expenditure in carrying on mining operations on a mining property... for the extraction of minerals... from their natural site'', receives, I think, additional support from two further circumstances.
The first of these circumstances is that no reference to expenditure of this character is contained in sub-para. (i) to (iv) of para. (a) of sec. 122A(1). These sub-paragraphs are, in my opinion, provisions of extension, for they include in the expression ``expenditure in carrying on prescribed mining operations'', expenditure which is in fact not incurred in the actual course of carrying on prescribed mining operations, but is preparatory to, or a prerequisite of, the carrying on of such operations: see CCH Australia Ltd., Australian Federal Tax Reporter, Vol. 3, \sp\61-360, pp. 35,386-7. A common use of the word ``including'' in a statute is to enlarge the meaning of preceding general words so as to bring within them matters to which they would otherwise not extend: see, for example, Dilworth v. Commissioner of Stamps (1899) A.C. 99 at pp. 105-106. Expenditure for the purpose of acquiring a mining property, or for the purpose of acquiring the right to use a property as a mining property, is itself expenditure which is preparatory to, or a prerequisite of, the carrying on of mining operations on the property, and if it had been intended that expenditure of this kind should be regarded as ``expenditure in carrying on prescribed mining operations'', within the meaning of sec. 122A(1)(a), one would have expected an express provision to that effect to have been made in a sub-paragraph following the word ``including''.
The second circumstance is that one effect of sec. 122A(1)(d), when read in conjunction with sec. 122B and with the definition of ``mining or prospecting right'' in sec. 122(1), is that in certain circumstances all or part of expenditure upon the acquisition of a mining property, or of the right to use a property as a mining property, can be ``allowable capital expenditure'' for the purposes of Division 10 of Part III of the Act. The existence of these express provisions itself suggests that save in
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cases covered by them, expenditure incurred for the purpose of acquiring a mining property, or for the purpose of acquiring the right to use a property as a mining property, is not ``allowable capital expenditure''.Counsel for Utah submitted that even if I rejected (as I have) Utah's principal claims for deductions under sec. 122D, nevertheless some deductions of a much smaller amount under sec. 122D ought to be allowed, because some parts of each of the two sums in question of $53,975 and $137,500 were, as it was submitted, allowable capital expenditure under sec. 122A(1)(a)(iii) or (iv). However, the questions raised by this submission were not really argued at all, nor were the particular items involved precisely defined either by reference to acreages or to money sums. Indeed, as I understood him, senior counsel for Utah conceded that if this alternative submission were to be properly dealt with, then some further evidence or some agreed statement of facts would be necessary. If Utah wishes to pursue this alternative submission, then I think that a further hearing will have to be arranged for the purpose.
Subject to anything which counsel may now wish to say, I propose to adjourn these appeals to a day to be fixed. I shall be on circuit in Wangaratta for the rest of this month, starting next Monday. If Utah decides not to pursue its alternative claims under sec. 122D, or if those claims can be the subject of agreement with the Commissioner, then a hearing can be arranged early in June at which I can simply pronounce final orders disposing of both appeals in accordance with these reasons for judgment. In that event I should be grateful if minutes of the orders could be prepared by counsel for Utah in consultation with counsel for the Commissioner, and submitted to me before the hearing. I have in this judgment simply dealt with the specific issues which counsel for both parties asked me to decide, and I have given no thought as to the precise terms of the orders. If Utah's alternative claims under sec. 122D are not pursued, then I think that the appropriate costs order would be that Utah's costs of both appeals be taxed and that the Commissioner pay to Utah a sum equal to three quarters of those costs. This matter was discussed to some extent in the course of counsel's final submissions, but if now, or at any future hearing, counsel wish to make further submissions about costs, I shall hear then. If Utah wishes to pursue its alternative claims under sec. 122D, then a day for the hearing thereof will have to be arranged, as I have earlier indicated.
That concludes all that I have prepared as my reasons for judgment.
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