Case X2
Members:PM Roach SM
Tribunal:
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
Despite having had the benefit of the expositions of counsel and despite a subsequent lengthy perusal of the documents which have been exhibited, just how the present problem arose is still far from clear. That being so, I propose to recount my findings as to the history of the matter in chronological order of disclosure between the parties. Those findings are as follows.
28 April 1982
2. On 28 April 1982 the applicant company (Err-co) presented its return of income to the Commissioner for the year of income ended 30 June 1981. It declared a net profit for the year of $1,064,919 but asserted a loss for tax purposes of $496,369. In presenting its accounts, it had included as income a sum of $1,108,815 described as ``sale of drilling information''. In consequence that amount formed part of the net profit of $1,064,919. However, by the return Err-co claimed to have that sum excluded from the computation of taxable income stating:
``(Err-co) acquired a 10% interest in ATP-XYZ from (Alpha-co) by drilling a well at a cost of $1,108,815. (Err-co) then sold this 10% interest to (Omega-co) at cost price i.e. $1,108,815. This expenditure was in respect to oil exploration and is therefore claimed under Section 124.''
3. The representations so made are now said to be inaccurate in that expenditure was in the sum of $1,231,216; the applicant did not acquire a 10% interest in the A.T.P. but only acquired a 50% interest in two blocks of the A.T.P.; and the applicant did not sell any interest to anyone but rather, upon a sale by
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Alpha-co to Omega-co of a 10% interest in the A.T.P., Omega-co owed $1,108,815 to the vendor and satisfied the debt by advancing it at the direction of the vendor upon loan to the applicant, repayable to Alpha-co at call and subject, it is said, to deferred payment of interest.14 October 1983
4. On 14 October 1983 the Commissioner assessed Err-co as having derived a taxable income in the year of income ended 30 June 1981 of $969,682. No additional tax for late return was levied. The adjustment sheet which accompanied the notice of assessment disclosed the following:
$ $
Net profit as returned 1,064,919
Legal fees disallowed 1,930
Bad debt disallowed 30,000
Claim for machines scrapped disallowed 195,797
Expenditure under sec. 124AH 420,831 648,558
------- ---------
1,713,477
Depreciation on machines allowed 58,739
Total sec. 124AH recoupment 685,056 743,795
------- ---------
Taxable income as shown in attached notice 969,682
---------
13 December 1983
5. The applicant by its new accountant objected in writing to the assessment. The adjustments made in relation to the scrapping of machines, bad debt and legal fees were not the subject of any challenge. Only two matters were raised: one was that an amount of allowable expenditure recouped under sec. 124AH of the Act in 1980 should be reduced by $186,032. In due course that claim was allowed.
6. The present issue relates to the only other item referred to in the objection. So far as is material to that objection, I propose to set out in full the relevant portions of the objection.
``Pursuant to the provisions of Section 185 of the Income Tax Assessment Act 1936 (as amended), hereinafter called the Act, (Err-co) by its public officer..., hereby objects against the assessment of income tax based on income derived by the said company in the year of income ended 30 June 1981 and issued to it by notice of assessment dated 14 October 1983, reference number... and claims:
- A...
- B...
- C That the Net Profit of the Company as returned for the year ended 30 June 1981 be reduced by an amount of $1,108,815 being an amount which was erroneously included as Income - Sale of Seismic [sic].
- D That in the light of the foregoing the Taxable Income of the Company for the year ended 30 June 1981 be reduced to nil.
The grounds upon which we rely are as follows:
- 1...
- 2...
- 3 That the assessment of income tax for the year ended 30 June 1981 has been calculated by the Deputy Commissioner on an incorrect and erroneous amount Net Profit, albeit reported by this Company. Specifically, an amount was incorrectly included as sale of seismic information (in respect of Drilling of `Dryhole') - $1,108,815. This receipt was in fact a Loan from the original holder of the Permit (ATP-XYZ), Alpha-co. No liability. Alpha-co N.L. sold a 10% interest in this prospect to Omega-co Ltd. for $1,108,815 which was remitted direct to (Err-co) as Operator. (Err-co) acquired a 50% working interest in the Authority To Prospect XYZ in return for being Operator and drilling the petroleum
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exploration well referred to as `Dryhole'. This error in the accounts of the Company was made by a former accountant to the Company, long since dismissed from service and is the subject of a Letter of Amendment of this date in respect of the 1981 income tax returns of both this company and Alpha-co N.L.- In support of these facts we have attached:
- • copy of agreement between Omega-co and Alpha-co dated 10 July 1980
- • copy of agreement between Alpha-co and Err-co dated 14 May 1980.
- 4. That pursuant to the facts outlined in paragraph 3, the Taxable Income of the Company for the year ended 30 June 1981 be reduced to Nil and that the assessment referred to above be withdrawn.
We await your advice should you require any further information in respect of this matter.''
No evidence was put forward in support of the assertion that amendments had been requested that day.
25 June 1984
7. On 25 June 1984 the applicant wrote to the Commissioner ``with further reference to our letter dated 13 December 1983'' proposing the amendment of the income tax return of Err-co for the year ended 30 June 1981 and to that end attaching copies of:
``Amended 1981 Statement of Assessment Particulars; Amended Balance Sheet as at 30 June 1981;
Amended Profit and Loss Statement for the year ended 30 June 1981;
Amended Depreciation and other Schedules relating to this return.''
The letter went on to say:
``The changes evident in these accounts are the net result of a series of adjustments and corrections to the books of account following a complete review of the accounts. Both the company accountant and auditor were reported subsequent to the lodgment of the original 1981 income tax return.''
9 July 1984
8. By letter of 9 July 1984 the Commissioner acknowledged receipt of the request for review of the assessment.
22 October 1986
9. By a letter of 22 October 1986 the Commissioner advised the applicant:
``The objection dated 13 December 1983 against the assessment which issued in respect of the year ended 30 June 1981 has been considered and the objection has been allowed to the extent indicated in the attached notice of amended assessment.''
The letter went on to advise the applicant that (inter alia) it was entitled to seek a review before this Tribunal, but it contained no reference at all to the request which had been made in June 1984 for any amendment. The amended assessment appending to that letter also issued on 22 October 1986 and reduced the taxable income previously assessed at $969,682 to $966,475. It was attended by an adjustment sheet. Instead of following the usual pattern of the amended assessment being reconciled to the amount previously assessed, it was presented in the following terms:
$ $ $
Amended net profit returned 308,878
Depreciation as per accounts Add 125,125
Legal expenditure disallowed Add 3,430
Section 124AH expenditure * Add 2,166,310
---------
2,603,743
Depreciation for tax purposes Deduct - 113,301
Doubtful debts written back Deduct 16,215
Section 124AH deduction * Deduct
10 November 1986
10. The applicant requested the Commissioner to refer his decision ``to disallow in part the objection against your assessment of income tax'' to this Tribunal for review.
30 June 1987
11. The Commissioner referred the dispute to this Tribunal.
12 April 1989
12. This Tribunal convened a preliminary conference by telephone at which the applicant was represented by one of its officers. Shortly thereafter the present solicitors for the applicant were instructed in the matter and they thereafter had the conduct of the proceedings. The Commissioner then retained his solicitors.
The issues
13. Thereafter the parties exchanged ``Statements of Facts, Issues and Contentions'' and the matter was set down for hearing. It was only at a late stage of the preparation that counsel for the Commissioner gave notice that it was alleged that the existing grounds of objection were insufficient to enable the Tribunal to grant the relief claimed. As a result the applicant's solicitors, as a convenient means of identifying the issues they sought to have argued, prepared further grounds of objection. Upon the commencement of the hearing, counsel for the applicant sought leave to amend the objection to incorporate those new grounds. The application was opposed by counsel for the Commissioner who submitted that, in light of the findings I have made, the Tribunal had no jurisdiction which would enable it to grant relief on the grounds now sought to be relied upon by the applicant. I do not propose to set out the proposed amendments. It suffices to say that by those amendments, the applicant proposes as grounds of objection to the assessment that Err-co has not been allowed a deduction in relation to expenditure of $1,231,216 - a deduction to which it claims to be entitled by reason of sec. 124AH(1) of the Act or sec. 51(1) of the Act, and so entitled notwithstanding the provisions of sec. 124AG, 124AM and 124AQ of the Act.
14. Before addressing the substantive problem, two further matters need to be mentioned. In the course of preparing for the hearing, the Commissioner made available to the applicant pursuant to the directions of the Tribunal an objection report of 13 February 1986. It is clear from a perusal of that objection report that, at the time the Commissioner determined the objection and issued the amended assessment, he was conscious of the contentions of the applicant as to the errors in the original return. The report recorded (inter alia):
``FACTS
1. When the 1981 return was lodged, the company returned an amount of $1,108,815 received by it for the sale of drilling information, as exempt income [sic].
2. The assessor treated the above income, as assessable income pursuant to Section 124AQ of the Act; as she considered it
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represented a reimbursement of exploration expenditure incurred by the company.3. The taxpayer in his notice of objection, stated that the information originally furnished by it in respect of the sale of seismic information is in fact incorrect; and the amount received by it was in fact a loan from a related company (Alpha-co).''
15. However, it was only upon the hearing and during the course of argument as presented by counsel for the Commissioner that disclosure was made to Err-co as to how the Commissioner had fixed upon the amounts of taxable income as assessed in the notice of assessment and notice of amended assessment respectively. The disclosures so made came six years and three years respectively after the notices of assessment had issued.
16. In relation to the original assessment the calculation of taxable income was declared to have been made as follows:
$ $
Net profit from retail sales (as returned) 383,934
Add: Amounts disallowed -
Legal fees 1,930
Bad debts 30,000
Machines scrapped 195,797
-------
227,727
Less: Amounts allowed -
Depreciation on machines 58,739 168,988
------- -------
552,922
Add: Exploration income -
General 622,280
Drilling Wethole 449,850
Drilling Dryhole
- Sale of Fuel 14,843
- Sundry income 14,843
---------
1,101,816
Less: Exploration expenditure claimed
- General 624,593
- Wethole 43,751
- Dryhole 861,302
---------
1,529,646
Net income - exploration (427,830)
Add: Recoupment - sale of 10% Interest
in ATP XYZ 1,108,815
---------
680,985
Less: Section 124AH expenditure
brought forward 264,225
---------
416,760
---------
TAXABLE INCOME AS PER ADJUSTMENT SHEET 969,682
---------
17. In relation to the amended assessment the calculations were disclosed to have been as follows:
18. Against that background, it is not surprising that counsel for the Commissioner readily conceded that no question of an exercise of discretion arose. There was no surprise or disadvantage to the Commissioner. His contention was simply that in the circumstances there is no power in the Tribunal to grant the relief sought. That argument was developed in two ways. First, it was submitted that, in so far as the Commissioner's determination upon the objection was properly before the Tribunal for review, the power of the Tribunal to no longer hold an applicant strictly to the grounds of his objection could not lawfully be exercised to grant relief in relation to entirely new issues. A second contention was that, in any event, there was no matter properly before the Tribunal. The latter submission was that, despite the terms in which the Commissioner had communicated notice of only partial allowance of the objection, the Commissioner had in fact wholly allowed the objection because, in making the original assessment, he had not brought the $1,108,815 to account as assessable income derived from the sale of seismic information. That being so, it was said, there was nothing further in the objection to be allowed. There was a further extension of that argument. It was raised in terms that a taxpayer can only take objection to an assessment if dissatisfied with an action of the Commissioner. Since, it is said, the entire problem originates with the mistakes made by Err-co, and since the Commissioner has in all respects adopted the figures presented by Err-co in its return of income, there could be no dissatisfaction on the part of the applicant with the Commissioner and, therefore, no objection at all in relation to this matter.
19. As to the latter submission, I am not persuaded that an applicant whose taxable income is assessed in accordance with his own erroneous return has no right of objection to an excessive assessment. Such a person is
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``dissatisfied with the assessment'' and in my view entitled to object. He does not have to be able to point to some ``wrongdoing'' (as it were) on the part of the Commissioner. It is sufficient that he is dissatisfied with the assessment, even though he is the sole cause of that dissatisfaction.20. That the problem exists is most unfortunate. That it only came to be recognised so late in these proceedings is regrettable. That the problem exists at all is predominantly the fault of those representing Err-co at the time when the return was prepared; when the objection to the assessment was drawn as it was; and later when no objection was made to the amended assessment. Those deficiencies might have been curable at the latter point in time if the amended assessment was judged to be so differently founded to the original assessment as to constitute ``a complete rewriting or reconstruction of the account for the year'' such as to give rise to unrestricted rights of objection (cf. Dixon and Evatt JJ. in
Trautwein v. F.C. of T. (1936) 56 C.L.R. 63 at p. 109).
21. If the matter had come to hearing when it should, as it would have if all concerned had acted with reasonable promptitude, it would have been heard before 1 July 1986. At that point, it would have been an unarguable proposition that the relief now sought could have been granted. Counsel for the applicant properly sought to find some comfort in the circumstance that, confusingly, the applicant had not only acknowledged the disputed amount as a sale contributing to its net profit (as per its profit and loss account), but also had claimed it as a deduction from that net profit to be brought to account in determining taxable income. If the objection had denied that the receipts constituted assessable income (as it did) and had also claimed the amount to be deductible (which it did not), there would have been no difficulty. It would have been open to a Taxation Board of Review to have granted the relief sought.
22. But the test for a Board of Review would not have been what was claimed in any return of income. The test would have been the notice of objection. No proper construction of the objection, no matter how liberally based, could spell out any assertion that in this respect the Commissioner had failed to allow any deduction to which the taxpayer was entitled. Nor can the circumstance that the Commissioner did not fully disclose what he had done in raising the assessment alter that circumstance. Faced with unclear communications from the Commissioner, what the applicant should have done is to have sought clarification and then, whether clarification was provided or not, to have so drawn its objection as to assert the correctness of its taxable income as represented by it. (In this instance reference to income tax returns as lodged would have been inappropriate. Amended accounts would have had to be drawn and annexed to the objection.) Alternatively or additionally, and with no more particularity than would be appropriate having regard to the disclosure (or lack of it) by the Commissioner as to what he had done in raising the assessments, the applicant should have claimed assessable income to be excessive and deductions and rebates to have been inadequate. It did not do so. If Err-co is to be limited to the grounds of its objection, it must fail.
23. But in 1989 the question becomes whether, in the circumstances of the case, the Tribunal has power to grant the relief sought, notwithstanding the inadequacy of the grounds of objection. The possibility arises because, whereas sec. 190 of the Act once provided that:
``(a) the taxpayer shall be limited to the grounds stated in his objection;...''
it now provides:
``(a) the taxpayer shall, unless the Tribunal or court otherwise orders, be limited to the grounds stated in his objection.''
I have expressed my views at some length in a number of cases and I refer in particular to the decisions in Case V102,
88 ATC 657 and Case V169,
88 ATC 1126. Since then, the President has addressed the same questions in Case W65,
89 ATC 590; a decision to the same effect as the views I had earlier expressed and which I now confirm. The views of the President were summarised in a passage (at para. 49, pp. 597-598) in which he said:
``I direct that to the extent that a claim has been made to which the taxpayer now seeks to add an alternative ground as the basis for the objection that the taxpayer be allowed to do so. To the extent that the taxpayer now
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seeks to increase the amount of relief sought in respect of a particular deduction that the taxpayer not be allowed to do so. To the extent that the taxpayer wants to add completely new grounds as a basis for the objection the taxpayer not be allowed to do so.''
I understand the latter sentence to refer to new grounds intended to lay a foundation for newly claimed relief, for otherwise the third direction would contradict the first.
24. The essence of the case which the applicant now seeks to put is that, having put in issue the treatment of certain receipts as assessable income, it now be allowed to assert that certain moneys expended should be allowed as deductions. Such a change, if permitted, would raise entirely new issues - as distinct from specifying additional ``grounds'' in support of the claim for relief which had been made.
25. For those reasons I conclude that there is no power in the Tribunal to grant the relief now sought. That being so, it would not be appropriate to allow the hearing to proceed and receive evidence over several days to be addressed to the issues of deductibility. That is unfortunate because, but for that circumstance, the parties were fully prepared for hearing. By reason of that circumstance, much of the preparatory work in the offices of both parties; and on the part of their respective solicitors and counsel will have been wasted.
26. But for all that the applicant is more fortunate than many. All is not necessarily lost. Because the Commissioner did not determine the original objection for over three years, and because when he did so, he issued an amended assessment, it is possible that the applicant could now secure an extension of time for lodging an objection to the amended assessment (sec. 188 Assessment Act), although such an extension of time could not be granted in relation to objecting to the original assessment because the last day for objecting to that assessment had passed long before 1 July 1986 (sec. 221 Taxation Boards of Review (Transfer of Jurisdiction) Act).
27. If such an extension of time upon being sought was refused by the Commissioner, the matter could then be reviewed by the Tribunal (sec. 188A(3) Assessment Act). Once an extension of time was granted, whether by the Commissioner or the Tribunal, the issue could be joined by the Commissioner disallowing the objection and, upon the request of the applicant, could have been referred to this Tribunal for determination. Compliance with that request for reference would have obliged the Commissioner to comply with the extensive documentary requirements imposed by sec. 37 of the Administrative Appeals Tribunal Act. By that protracted and expensive process, needlessly complicated in circumstances such as these, the applicant might have achieved a right to be heard upon the issue in dispute. That was the substantive issue which the parties were ready to litigate. That position could have been achieved simply, economically and quickly if the Tribunal had been empowered to authorise the applicant to proceed on the proposed new ground - a course which in the circumstances would not have been to the disadvantage of the Commissioner who, by his counsel, was ready to address and to have brought to final determination all substantive issues.
28. Much has been achieved in the reform of tax litigation procedures, but much remains to be done. I trust those with the power to act in these matters will give their attention to these proposals.
29. Questions remain as to the future conduct of this matter and another (VT.87/4094). To that end I will direct that a telephone directions hearing be convened at an early date after the publication to both parties of these reasons for decision.
30. The decision of the Tribunal is that it has no power or authority to grant relief to the applicant on the grounds proposed by way of amendment.
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