Lucas v. O'Reilly.

Judges:
Young CJ

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 19 March 1979.

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Young C.J.: In the action in which these interlocutory summonses are brought the plaintiff, who is a solicitor, sues the Commissioner of Taxation of the Commonwealth for an injunction restraining him from assessing the plaintiff's liability to income tax upon the basis that he is liable to pay additional tax pursuant to sec. 226(2) of the Commonwealth Income Tax Assessment Act (which I shall refer to simply as ``the Act'').

The year of income involved is the year ended 30th June, 1978, during which, the plaintiff says in his statement of claim, he was a member of two partnerships, viz.:

• (a) Clemens, Lucas & Mulvany, a firm of solicitors; and
• (b) Clemaluc Traders, a firm of share traders.

The plaintiff alleges that whilst he shared in a net profit of the solicitor's firm, he also had an interest in the partnership loss of Clemaluc Traders to the extent of 9.05% of that loss which was of $11,129,227.00. The plaintiff's share was thus $1,007,195.00.

The statement of claim alleges that the plaintiff and each of the partnerships duly lodged with the defendant returns respectively setting forth a complete statement of the income derived by them during the year of income and of the deductions claimed by them. It alleges that the loss incurred by Clemaluc Traders was arrived at in accordance with the provisions of the Act and in accordance with the principles laid down in
Curran v. F.C. of T. 74 ATC 4296; (1974) 131 C.L.R. 409.

The statement of claim proceeds to assert that sec. 6BA of the Act which was introduced after the decision in Curran's case did not affect the determination of the partnership loss incurred by Clemaluc Traders. This allegation may be said to enshrine the real point at issue between the parties. Paragraph 9 asserts, using the language of sec. 226(2) of the Act, that the plaintiff did not omit from his return any assessable income or include in his return as a deduction for expenditure incurred by him any amount in excess of the expenditure actually incurred by him. Paragraph 10 contains a similar allegation in respect of Clemaluc Traders.

Paragraphs 11 and 12 of the statement of claim should be set out in full. They read:

``11. The defendant threatens and intends to, and will unless restrained, make an assessment of tax payable by the plaintiff, and issue notice thereof to the plaintiff, upon the basis that:

• (a) no deduction is allowable to the plaintiff in respect of his individual

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  interest in the partnership loss of Clemaluc Traders;
• and
• (b) the plaintiff is liable to pay as additional tax, pursuant to sec. 226(2) of the Act in respect of the year of income, 50 per centum (50%) of the difference between the tax assessed by the Commissioner and the tax that would be payable if it were assessed upon the basis of the return furnished by the plaintiff.

12. The defendant threatens and intends to, and will unless restrained, make the said assessment and issue notice thereof to the plaintiff:

• (a) without any, or any sufficient, lawful authority;
• (b) knowing that the same is not lawfully authorized;
• (c) not for the purposes of administering the law, and in particular the Act, but for the purpose of, or purposes which include the purpose of, inducing the taxpayer and other taxpayers not to claim deductions in similar circumstances, and to withdraw any claim for deduction made, and deterring taxpayers in general from engaging in steps for the purpose of minimizing their income tax which steps the Commissioner regards as undesirable;
• and
• (d) without any, or any proper, consideration of whether any additional tax properly payable should be remitted.''

On 20th February, 1979, an interim injunction was obtained ex parte on behalf of the plaintiff restraining the defendant from assessing the plaintiff to additional tax pursuant to sec. 226(2) of the Act. Upon service of that interim injunction the defendant took out a summons which sought the following relief:

``1. That the Statement of Claim herein be struck out and the action dismissed pursuant to the inherent jurisdiction of this Honourable Court upon the grounds -

• (a) that the Court has no jursidiction in respect of the action; and/or
• (b) that the said Statement of Claim discloses no cause of action.

2. That the defendant have special leave to make to the Judge in Chambers the application in para. 3 hereof.

3. Pursuant to Order 25 rule 4 of the Rules of the Supreme Court, that the said Statement of Claim be struck out upon the ground that it discloses no reasonable cause of action and that the action be dismissed.

4. Such further or other orders as to the Judge seems meet.''

The plaintiff also took out a summons seeking the grant of an injunction until the trial of the action. Both summonses came on for hearing before me and were heard together. I granted the appropriate leave to the defendant in so far as it was necessary to make the application to a judge in chambers. The interim injunction is now spent but it was replaced by an undertaking on behalf of the defendant which has the effect of preventing the defendant from assessing the plaintiff to additional tax pursuant to sec. 226(2) of the Act until after the determination of the defendant's summons.

At the hearing which extended over several days, a large number of points was argued. Many of them raise matters of great importance. However, since the proceedings are interlocutory, I do not propose to deal with more of the points argued than is necessary for my decision and even with those points I shall attempt to go no further than is necessary for the purpose of deciding what orders should be made.

The first question to decide is whether the statement of claim discloses a cause of action. This question is to be decided upon an examination of the statement of claim without regard to any evidence.

After perhaps a little vacillation, it was asserted on behalf of the plaintiff that the cause of action relied upon was the right of the plaintiff to prevent the defendant from exercising a statutory power when he had no authority to do so. It was said that the defendant had no authority or power to assess the plaintiff to additional tax in the manner which the plaintiff feared he would attempt to do.

To express the cause of action in this way is to rely on part only of para. 12 of the statement of claim. It omits any reference to para. 12(b), (c) and (d) which may be sufficiently described as containing allegations of mala fides. I shall return to the allegations in those sub-paragraphs later but it is clear that the principal way the plaintiff's case is put is that he may

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obtain an injunction restraining the defendant from assessing him even in good faith to additional tax in the way that is feared. In other words it is asserted on behalf of the plaintiff that if he can show that the defendant intends to assess his liability to tax in the way he fears he can raise the question of the correctness of the threatened assessment for consideration in proceedings in this Court before any notice of assessment is issued. For the purpose of considering whether the statement of claim should be struck out either pursuant to the inherent jurisdiction or pursuant to Order 25 rule 4 upon the ground that it discloses no cause of action, it will be convenient first of all to proceed upon the basis that the facts stated in the statement of claim are true, although since the pleading contains some allegations of law the facts relied upon are not as clear as might be desirable. For instance, the allegation that the partnership loss of Clemaluc Traders was arrived at in a certain way does not set out the facts upon which liability to tax might be determined. However it will be convenient to begin by assuming that the statement of claim sufficiently alleges and that the plaintiff could establish that an assessment on the basis feared, although made in good faith, would be contrary to the Act.

There is a superficial attraction in the argument that if the defendant is proposing to issue an assessment which is not in accordance with the Act, he should be restrained from doing so at the suit of the person to be so assessed. It was, however, acknowledged by counsel for the plaintiff that it had never been done before and that there is no direct authority suggesting that such a remedy is available. This acknowledgment prompts a reference to the judgment of Fullagar J. in
Re K.L. Tractors Ltd. (in liq.) (1961) 106 C.L.R. 318 at p. 338 where his Honour said:

``It may seem curious that there is so little in the books bearing directly on the argument now raised. But a not uncommon reason for dearth of direct authority on a point is that there has been a general consensus of opinion that the point is not tenable.''

I have come to the conclusion that the plaintiff's primary contention should not be accepted and that it should not be accepted because the Act upon its proper interpretation shows that a taxpayer (as defined in sec. 6) does not have or is not entitled to assert such a right as the plaintiff claims. I shall not set out the structure of the Act in great detail. It will be sufficient to refer to the principal sections relevant to the present question. Most of them are to be found in Parts IV, V and VI.

Part IV is concerned with returns and assessments. Section 161 requires the furnishing to the Commissioner of a return setting forth a full and complete statement of income derived during the year of income. Section 166 requires the Commissioner from the returns and from any other information in his possession to make an assessment of the amount of the taxable income of any taxpayer and of the tax payable thereon. Section 166 is, so to speak, the principal assessment section. It is expressed in terms of a duty upon the Commissioner. The immediately following sec. 167, 168 and 169, also contain power or authority for the Commissioner to make assessments in certain cases and are expressed in terms of authority rather than duty. Section 170 authorises the Commissioner in certain circumstances to amend an assessment. Section 174 requires the Commissioner as soon as conveniently may be after any assessment is made to serve notice thereof in writing by post or otherwise upon the person liable to pay the tax. Section 175 provides that the validity of any assessment shall not be affected by reason that any of the provisions of the Act have not been complied with.

Section 177 is the most important section for present purposes and it will be as well to set out subsec. (1) in full. It reads:

``The production of a notice of assessment or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and (except in proceedings on appeal against the assessment) that the amount and all the particulars of the assessment are correct.''

Part V of the Act deals with Objections and Appeals and provides an elaborate set of procedures open to a taxpayer dissatisfied with any assessment. It is unnecessary to refer to any of the sections in detail but it is worth noticing that an objection to an assessment must be lodged within sixty days after service of the notice of assessment (sec. 185) and that there is no power in any Court or other Tribunal to extend the time. If a taxpayer does not lodge an objection to an assessment within sixty days, he loses forever his right to object to that assessment. By sec. 190 a taxpayer is limited on appeal to the grounds stated in his objection and the burden of proving that the assessment is

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excessive rests upon the taxpayer. Section 201 provides that the fact that an appeal is pending is not to interfere with or affect the assessment the subject of the appeal and income tax may be recovered on the assessment as if no appeal were pending. Section 202 provides for the adjustment of tax after an appeal, amounts paid in excess being refunded and amounts short paid being recoverable.

Part VI is concerned with the collection and recovery of tax. Section 204 provides that income tax is to be due and payable by the person liable to pay the tax on the date specified in the notice as the date upon which tax is due and payable and sec. 208 provides that income tax when it becomes due and payable is to be a debt to the Crown on behalf of the Commonwealth and payable to the Commissioner. By sec. 209 tax unpaid may be sued for by the Commissioner in any Court of competent jurisdiction.

The considerations which have led me to the conclusion that the Act in effect precludes the plaintiff from being able to rely upon the cause of action which he asserts or to obtain the remedy which he seeks, where it is alleged that the Commissioner is acting in good faith may be stated as follows:

(1) If the cause of action relied upon by the plaintiff is based upon a breach of a statutory duty, the plaintiff must show not only that the duty which is alleged to have been or to be about to be broken is a duty owed to him but also that the statute creating the duty confers upon him a right of action in respect of any breach. It was not perhaps submitted on behalf of the plaintiff that the Commissioner owed a duty to him to assess his liability to tax in accordance with the provisions of the Act or even not to assess his liability to tax except in accordance with the provisions of the Act, but I am disposed to think that in one form or other the contention lay behind the plaintiff's submissions. However, it is, I think, clear that the defendant owes the plaintiff no such duty. The duty of the Commissioner is owed to the Crown. To express the point in another way and to use the language of Dixon A.J. (as he then was) in
Attorney-General v. T.S. Gill & Son Pty. Ltd. (1926) V.L.R. 414 at p. 416, the Court must be satisfied not only that a breach of duty is about to be committed but also that there is in the plaintiff a right to complain of that breach of duty. In my opinion it is not in that sense a breach of duty by the Commissioner to issue an erroneous assessment and it is not open to the plaintiff to complain of the issue of an erroneous assessment except on appeal under Part V.

The Act provides its own remedy to a taxpayer who claims that he has been wrongly assessed. He may appeal to a Board or a Court pursuant to the provisions of Part V and by these provisions the Legislature has shown that the prescribed method of objection and appeal is to exclude any other challenge to an assessment. If a taxpayer is assessed in a manner which he contends is incorrect he cannot challenge the assessment except in the manner prescribed. Section 177 is conclusive on this point. It must be noted that sec. 177(1) makes production of a notice of assessment conclusive evidence not only of the due making of the assessment, but also that the amount and all the particulars of the assessment are correct. The sub-section literally says that production of a notice is to be conclusive evidence but no doubt it means that the notice rather than the act of production is to be conclusive evidence.

(2) If a taxpayer cannot challenge an assessment once issued except pursuant to Part V, it would be strange indeed if he could challenge its intended making and issue by some other process.

(3) The very process of assessment and issue of notice renders unsuitable the action which the plaintiff has taken. Assessment is defined in sec. 6 as meaning the ascertainment of the amount of taxable income and of the tax payable thereon. The Commissioner is to make an assessment from the returns and from any other information in his possession (sec. 166) and this almost necessarily precludes a plaintiff from establishing before notice of an assessment issues that the Commissioner intends to assess in a particular way. It may be otherwise if a taxpayer can show before notice issues that the Commissioner has assessed him in a particular way: he might then be thought to be able to restrain issue of the notice which creates the liability, but it would be impossible or almost impossible for a plaintiff to establish such facts. Of course the difficulty of establishing facts does not, of itself, show that no cause of action exists but when the situation in which a plaintiff finds himself is entirely the result of statutory provisions the very unsuitability of a challenge to arrest the operation of the process of assessment may be taken to indicate that the statute did not intend to give any such right or to permit any such remedy.

(4) The unsuitability of the process followed by the plaintiff may be shown in another way.

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If the plaintiff were correct in his contention that he is entitled to obtain a declaration that an intended assessment would be erroneous if made, any taxpayer who had made a return might seek a declaration that the only proper assessment would be of such and such an amount. To such a claim the Commissioner might properly respond by saying that he had not made an assessment and although there is an ultimate time limit upon the Commissioner (see sec. 171), a declaration could hardly be granted until it had been shown that the Commissioner was ready to make the assessment. For the Commissioner is required to make an assessment not only from the returns but also from any other information in his possession and no doubt information continues to come into his possession up to the moment of making the assessment. (Cf.
George v. F.C. of T. (1952) 86 C.L.R. 183 at pp. 203-5.)

(5) In any action such as the present if no injunction were granted and no undertaking not to assess were given, the plaintiff could have no cause of action from the moment when the assessment was made or notice of the assessment was issued. Thus the contention on the part of the plaintiff is that he has a cause of action to obtain an injunction to restrain an act which if done would destroy the very cause of action on which he sues. Mr. Webb conceded that if notice of an assessment were given to the plaintiff he could not challenge it except under Part V of the Act. The situation is not like the situation which is commonly encountered and in which performance of a threatened act would cause irreparable damage, but it is a situation in which the very cause of action asserted would be eliminated by the threatened act, and in such a situation the strongest reason exists for concluding that the cause of action alleged is no cause of action at all. Put in another way, a quia timet injunction is granted to restrain the commission of an unlawful act and if production of notice of the act sought to be restrained (i.e. the assessment) is given by the law the status of conclusive evidence of the due doing of the act (i.e. of the due making of the assessment) and (except in proceedings on appeal against the assessment) that the amount and all the particulars of the assessment are correct, I do not think that the act sought to be restrained can be described as unlawful. Although the Commissioner is not authorised to issue an erroneous assessment, the making of an assessment which is afterwards seen to be objectively erroneous is not simply on that ground to be regarded as unlawful. Nor is it to be so regarded if it can be shown in advance that an intended assessment would be erroneous. The Act does not contemplate that the Commissioner will never make a mistake or issue notice of an erroneous assessment for it provides in Part V various procedures for the correction of erroneous assessments on appeal. (Cf. George v. F.C. of T. (1952) 86 C.L.R. 183 per Fullagar J. at pp. 207-8.)

(6) No question of the ``powers'' of the Commissioner is involved. The Commissioner has power to assess the liability of the plaintiff to tax and although he must not intentionally make an erroneous assessment, if he should in good faith issue notice of an erroneous assessment, it is not void as being beyond his powers, but by sec. 177 conclusive evidence of the due making of the assessment and (except in proceedings on appeal against the assessment) that the amount and all the particulars of the assessment are correct. (As to the effect of sec. 177 see
McAndrew v. F.C. of T. (1956) 98 C.L.R. 263 at pp. 270, 277, 280.)

Mr. Webb relied heavily upon the decision of the High Court in
Bradley v. Commonwealth (1973) 128 C.L.R. 557 in which a majority of the High Court declared that a direction given by the Postmaster-General was invalid and granted injunctions accordingly. The question in that case was whether the Postmaster-General had power to withdraw services from a person in a case not expressly provided for by the Post and Telegraph Act or the Regulations made thereunder. The Postmaster-General had withdrawn all postal and telecommunication services for the Rhodesia Information Centre in Sydney and the assistant director of the Centre sued for a declaration that the direction was unlawful. The majority held that the question for decision was whether the direction issued by the Postmaster-General was beyond the powers conferred on him by law. They held that there were clear indications in the Post and Telegraph Act 1901-1971 that it was intended that a letter which is properly addressed and stamped and which was received at a post office for transmission and delivery is to be transmitted and delivered to the address indicated (see per Barwick C.J. and Gibbs J. at p. 566 and per Stephen J. at p. 593). They concluded from an examination of the Act that no authority existed for the giving of the directions in relation to the plaintiff's mail which the Postmaster-General had given. Their conclusions are in my opinion tantamount to saying that the Postmaster-General, having provided the plaintiff with postal services, was under a duty to continue to provide him with postal services which could only be withheld in

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the cases specifically authorised by the Act or the Regulations. It is true that at p. 575 Barwick C.J. and Gibbs J. appear to draw a distinction between the absence of authority for the direction given and the right to the use of the mail, but I do not take their Honours to be saying that anyone to whom no duty was owed by the Postmaster-General might obtain a declaration that a direction given by him was invalid. It was the breach of the duty owed to the plaintiff that the majority thought should be restrained by injunction. (See the form of injunction granted at p. 594.) Menzies J. (with whom McTiernan J. agreed) dissented because he could find no such duty as the majority found (see p. 585). Thus the decision does not in my opinion assist the plaintiff in the present case. It does not assist the plaintiff because I cannot find in the Income Tax Assessment Act any duty owed by the Commissioner to the plaintiff.

If I were wrong in the view that I have taken of the decision of the majority in Bradley's case and if in truth the mere proof that a direction of the Postmaster-General was unauthorised were sufficient to found a right to an injunction I would still not regard the decision as of assistance to the plaintiff in the present case. The reason is that what the plaintiff here alleges is that the Commissioner will issue notice of an assessment which is erroneous but such a threatened act is not beyond the powers of the Commissioner in the same sense as the direction in Bradley's case was beyond the powers of the Postmaster-General. The Commissioner is not knowingly to issue an erroneous assessment but the Income Tax Assessment Act in fact contemplates that he may do so for it provides a machinery for the correction of such an assessment. No such provisions can be found in the Post and Telegraph Act.

I was referred also to a number of other cases said to show that an injunction may be obtained upon proof that an officer of the Commonwealth is about to act beyond his powers without establishing that the plaintiff has a cause of action against the officer concerned or against the Commonwealth. I shall not make an extensive examination of those cases in these reasons. It is sufficient to say that I do not find in them any basis for the grant of an injunction in the present case where (upon the basis at present under consideration) it is not alleged that the Commissioner is proposing to act beyond his powers except in the sense that the threatened assessment may afterwards or can now be shown to be erroneous. Amongst the large number of cases referred to, the principal ones relied upon were: (1)
Automatic Totalizators Ltd. v. F.C. of T. (1920) 27 C.L.R. 513 (which was not an assessment case and no question of the plaintiff's cause of action appears to have been debated); (2)
Colonial Sugar Refining Co. Ltd. v. The Commonwealth (1912) 15 C.L.R. 182 (in which the question of the authority or powers of a government instrumentality was in question); (3)
F.C. of T. v. Smorgon 76 ATC 4364; (1976) 134 C.L.R. 475 (which was not an assessment case).

For these reasons I am of the opinion that in so far as the statement of claim proceeds upon the basis that the Commissioner's threatened assessment will be made in good faith, it discloses no basis for the grant of the injunction sought.

The statement of claim does not confine the plaintiff's allegations to a threatened exercise of power in good faith. Paragraphs 12(b), (c) and (d) contain allegations that the defendant threatens to make an assessment of tax payable by the plaintiff and issue notice thereof to the plaintiff ``knowing that the same is not lawfully authorised'' and moreover for a purpose foreign to the purpose for which the power to assess is granted. In considering the plaintiff's cause of action I have so far omitted consideration of these allegations. I have done so because the plaintiff did not rest his primary case upon them. I am, however, disposed to think that these allegations place an entirely different complexion on the plaintiff's claim. Although it may not have been intended as such, I think that it is just sufficient as a pleading of misfeasance in a public office. See
Farrington v. Thomson & Bridgland (1959) V.R. 286. Although the relief claimed might not be entirely appropriate, the plaintiff does in his statement of claim seek such further or other relief as may be just. The essence of such an action appears to be knowledge that the act in question is an abuse of the office: see
Smith v. East Elloe R.D.C. (1956) A.C. 736 at p. 752. It may be observed also that a cause of action for misfeasance in a public office in issuing notice of an assessment knowing it not to be lawfully authorised would not be defeated by the issue of notice of the assessment. Upon this basis I think that the statement of claim discloses a sufficiently arguable cause of action to prevent its summary striking out.

Mr. Batt who appeared for the Commissioner sought the striking out of the statement of claim pursuant to the inherent jurisdiction of the Court upon the alternative basis that the action could not possibly succeed.

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To consider this ground reference may be made to evidence. I can, however, dispose of it briefly. If there were no allegation of mala fides, I would for the reasons already given strike out the statement of claim under Order 25 rule 4. In view of the allegation of abuse of power, however, I do not think that I should take that course. I think that a proper exercise of judicial discretion requires me to leave the plaintiff to pursue his action, for I cannot upon such evidence as he has filed say that he must necessarily fail. It is significant that the defendant has filed no answering affidavit.

For these reasons the defendant's summons will be dismissed and I turn to consider the plaintiff's summons for an interlocutory injunction.

I think that an interlocutory injunction should be refused for the following reasons:

1. There is no real evidence suggesting mala fides on the part of the defendant. The plaintiff does not show a prima facie case. In his affidavit he deposed to a telephone discussion with an officer of the Taxation Department in which it is said (inter alia):

``I asked him how it was possible for me to avoid receiving an assessment with a penalty imposed for my participation in a `Curran type Plan'. He said that each case was to be considered on its individual merits. I said that it was clearly not a case of consideration of individual merits, as it appeared that as a clear policy matter penalties were being imposed `across the board' regardless of individual situations. I repeated that I wanted to know how it would be possible for me to avoid a penalty. I said that I was quite happy to answer any questions whatsoever about the matter, and that I was satisfied from the material disclosed in the returns, and the knowledge gained by the Taxation Office as a result of its investigations to date, the Department was informed fully as to the subject matter of the claim. He made no definite response. I referred to the newspaper article headed `Taxman's Double Whammy' (Exhibit JML 14) and to the suggestion in it that taxpayers who were penitent and agreed to abandon their claim were likely to have the penalty waived. Mr. Clancy indicated in general terms that the Taxation Office would look favourably upon such a proposition, but then emphasised that each case would be considered on its individual merits.''

Exhibit JML14 was an extract from a newspaper under the headline quoted. It was ultimately agreed on behalf of the plaintiff that the extract was not admissible in evidence and could at most be looked at to explain the passage quoted from the plaintiff's affidavit.

Even in the absence of any answering affidavit by the defendant and taking this evidence in conjunction with the announcement of the Treasurer on 3rd October, 1978, to the effect that the Commissioner would be contesting the interpretation of sec. 6BA of the Act relied upon by the plaintiff, it does not found a basis for even a prima facie conclusion that the defendant proposes to issue a notice of assessment of tax payable by the plaintiff knowing that the same is not lawfully authorised or for some purpose other than the proper administration of the law.

2. Damages would, in my opinion, be an adequate remedy. The amount of tax at stake is said to be approximately $659. It was said by the plaintiff that his name would be published by the Commissioner in his report to Parliament pursuant to sec. 14 of the Act as a person who had understated his income and that this would be seriously damaging. If the plaintiff objects to his assessment when it is received it would in my opinion be a serious abuse of power by the Commissioner if he were to publish the name of the plaintiff as having understated his income before the objection and any appeal in relation thereto was finally disposed of. But I am assured that there is no intention of the Commissioner so acting and in view of what appears at p. 129 of his report to Parliament for the year 1976/1977 (No. 56) I do not think that an injunction is necessary on this ground. If it were necessary to grant an injunction it would go not against the making of the assessment or to prevent the giving of notice of it but to prohibit inclusion of the plaintiff's name in the report as one of the persons who had understated his income for the year in question.

For these reasons the plaintiff's summons must be dismissed.