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Fletcher & Ors v. Federal Commissioner of Taxation

Judges:
Lockhart J
Wilcox J
Lee J

Court:
Full Federal Court

Judgment date: Judgment handed down 28 June 1990.

Lockhart, Wilcox and Lee JJ.

The question in this appeal from the decision of the Administrative Appeals Tribunal, Taxation Division [reported as Case W118,
89 ATC 922] is whether the Tribunal erred in law in upholding the disallowance by the Commissioner of Taxation of certain deductions claimed by the applicants under the Income Tax Assessment Act 1936 (``the Act'').

This is the second occasion on which this matter has come before a Full Court of the Court. The first appeal was heard by a Full Court, differently constituted (Lockhart, Wilcox and Burchett JJ.), from a decision of the Tribunal, also differently constituted, affirming the disallowance by the Commissioner of Taxation of objections to 14 assessments of income tax. The Full Court allowed the appeal, set aside the decision of the Tribunal and remitted the matter to the Tribunal for further hearing. In its reasons for judgment the Full Court referred to arguments that the relevant transactions were shams or a fiscal nullity; that the interest payments were outgoings incurred under a ``tax avoidance agreement'' within the meaning of sec. 82KH(1) of the Act and were therefore not deductible by virtue of sec. 82KL of the Act; that Pt IVA of the Act applied to the transactions; and, of particular relevance to the present appeal, whether the disputed amounts were deductible pursuant to sec. 51 of the Act as being outgoings incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such income. The Full Court's judgment is reported at 88 ATC 4834; (1988) 19 F.C.R. 442.

The Full Court rejected the Commissioner's arguments on sham and fiscal nullity; hence those questions ceased to be relevant thereafter. It remained on the rehearing before the Tribunal for it to consider the application of sec. 51, Div. 3 of Pt III and IVA.

On the rehearing before the Tribunal no fresh evidence was led by either party, so the Tribunal determined the matter on the evidence which had been before the Tribunal as originally constituted. The Tribunal adopted the statement of the facts as set out in the reasons for judgment of the Full Court on the first appeal and made certain additional findings of fact.

The relevant facts are complicated, but we need not set them out because they are comprehensively stated in the reasons for judgment of the Full Court which first dealt with this matter. It is sufficient for present purposes if we briefly state the primary facts so far as the possible application of sec. 51 is concerned.

The applicants were partners in the business of subdividing and selling land at Killarney Vale on the Central Coast of New South Wales. They decided to invest money in a scheme, details of which were contained in a brochure advertising the availability of ``future cash benefits''. Three different investment plans were offered spanning terms of 15, 20 and 25 years respectively. Features common to all three plans were that income tax deductions were said to be available in each of the first five years and that moneys were to be received by the investor only during the last five years of the plan. In the year of income ended 30 June 1982 the four applicants invested a total of $50,000 under the 15-year plan. They signed documents including a partnership agreement, two loan agreements and an annuity agreement the effect of which is set out in the earlier reasons for judgment of the Full Court. A great deal of activity occurred in relation to the signing of documents including drawing, indorsing and accepting bills of exchange, the net result of which was described by the Full Court as being that all three bills ended up in the hands of the original drawee with no payment actually passing under the bills. The only money which did pass by the end of June 1982 was the $50,000.

In each of the years of income 1983, 1984 and 1985 similar ``round robins'' with bills of exchange were carried out to effect the payments required by the loan agreements and the annuity agreement. The partnership was known as ``Annuity Investments Partnership No. 18'' which submitted an income tax return for the year ended 30 June 1982. That return showed income of $170,000, being the annuity received, and expenditure of $494,667 being interest paid of $360,000 and undeducted purchase price of $134,667. The result was a net loss of $324,667. In their personal returns of income each of the applicants claimed as a deduction one-quarter of this last-mentioned amount. In each case these claims were rejected, objections lodged but disallowed.

ATC 4561

Although the relevant sums differed a little, the same course of events occurred in subsequent relevant years, thus giving rise to the 14 appeals to the Tribunal.

On the rehearing the Tribunal made findings including the following (at p. 936):

``11. On the whole of the evidence as it emerges from the transcript, we are satisfied that when the extreme artificiality of this financial scheme is examined, involving as it does bills of exchange for millions of dollars going on a merry-go-round and finishing up, as clearly intended, back in the hands of the drawee, the conclusion is overwhelming, viz. that this whole exercise had, as far as the accountants were concerned, the dominant purpose of reducing the taxable income of their clients.''

With respect to sec. 51 the Tribunal found (at pp. 942-943):

``15. Turning to the law, we are satisfied that the appropriate test to be applied is not to look for the subjective intention of the taxpayers but to ask: what was the impugned expenditure intended to achieve? When the question is posed in that way, what the Fletchers and Dunlops intended or believed becomes irrelevant once it is found that the clear purpose of the expenditure, as revealed by the evidence, was to obtain a tax deduction...

16. Applying the test we have outlined above, it follows that once we have concluded that this scheme was just another vehicle promoted for the dominant purpose of reducing taxable income, it follows that the interest payments do not constitute outgoings which were incurred in gaining or producing assessable income of these taxpayers. This test received support from the views expressed by their Honours of the High Court (albeit in a different context) in
John v. F.C. of T. 89 ATC 4101 at p. 4105:

  • `In
    Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1948-1949) 78 C.L.R. 47 it was stated by the Court (at p. 56) that `for expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to the end'. In
    F.C. of T. v. Ilbery 81 ATC 4661... Toohey J. said (at ATC pp. 4666-4668...) by reference to the above statement from Ronpibon Tin that `that was not to exclude the notion of purpose'. His Honour added that `purpose may stamp the outgoing as one having no relevant connection with the gaining or producing of assessable income'.
  • Although the first limb of sec. 51(1) speaks of a loss or outgoing `incurred in gaining or producing the assessable income', a loss or outgoing may be so incurred notwithstanding that no income has been gained or produced in the period in which the loss or outgoing is claimed to be deductible. The test of deductibility under that limb, as laid down in Ronpibon Tin, is that `it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income' (at p. 57).
  • It is readily understandable that, if no income has been gained or produced and a question arises as to whether the occasion would be expected to produce assessable income, consideration of the purpose for which the expenditure was outlaid might not be wholly irrelevant. It may be too that even where income is produced `the purpose for which the advantage occasioning the loss or outgoing is sought may evidence a sufficient relationship with the income-earning process':
    Handley v. F.C. of T. 81 ATC 4165... per Stephen J. at pp. 4168-4169. But the cost of a step taken in the process of gaining or producing income must be regarded as an outgoing or taken into account in calculating the loss (if any) incurred, whatever purpose or motive may have attended all or any of the steps involved.'

17. We consider it highly significant that the High Court referred to Toohey J.'s decision in Ilbery with approval (the other two members of the Court concurring). Elsewhere in his judgment, Toohey J. stated (at p. 4667):

ATC 4562

  • `As Brennan J. pointed out (in the
    Magna Alloys case 80 ATC 4542 at p. 4547):
  • `Though purpose is not the test of deductibility nor even a conception relevant to a loss involuntarily incurred, in cases where a connection between an outgoing and the taxpayer's undertaking or business is affected by the voluntary act of the taxpayer, the purpose of incurring that expenditure may constitute an element of its essential character, stamping it as expenditure of a business or income-earning kind.'
  • Conversely, I would add, purpose may stamp the outgoing as one having no relevant connection with the gaining or producing of assessable income.'

The above passage was, in turn, cited with approval by Wilcox J. in
Anderson v. F.C. of T. 89 ATC 4982 at pp. 4990-4991, a case which, like the present one, involved expenditures incurred by a partnership for no discernible purpose other than to derive a tax deduction.

18. In the result, we are satisfied on the authorities that once it has been shown - as in this case - that the purpose of the impugned outgoing was to obtain a tax deduction, that fact sufficiently colours the outgoing to take it out of sec. 51; cf. Case V104,
88 ATC 670 at p. 676.''

Having decided that sec. 51 did not apply, the Tribunal did not find it necessary to make any findings with respect to the application of sec. 82KH to 82KL or Pt IVA of the Act, and affirmed the decisions of the Commissioner disallowing the objections of the applicants.

The argument on appeal was confined to the question of the correctness of the Tribunal's decision that sec. 51 did not operate to render the interest payments deductible. It was common ground between the parties that, if this Court held that the Tribunal applied an incorrect test in law with respect of sec. 51, the Court might either remit the matter to the Tribunal (see Administrative Appeals Tribunal Act 1975 sec. 44(4) and (5)) or itself deal with the matter (sec. 44(4) and
Statham & Anor v. F.C. of T. 89 ATC 4070); though the parties differed as to which of these courses the Court should take in the exercise of its discretion. It was also common ground that, since questions relating to subdiv. D of Div. 3 and Pt IVA of the Act were not considered by the Tribunal (those matters being raised by the notice of contention filed by the Commissioner), it would be preferable that the whole matter be remitted to the Tribunal if the appeal was not disposed of on the sec. 51 question.

The applicants accepted the findings of fact of the Tribunal on the rehearing before it and the conclusions of the Tribunal set out in para. 11 of the Tribunal's reasons, cited earlier. The applicants confined their attack on the Tribunal's reasons to the tests which the Tribunal applied in determining that the outgoings in question were not allowable deductions. Counsel for the applicants submitted that the sole question for the Tribunal with respect to sec. 51(1) was whether the interest in question was incurred in gaining or producing assessable income, which involved in turn ascertaining whether there was some connection between funds borrowed and the earning of assessable income. Reference was made to
F.C. of T. v. Munro (1926) 38 C.L.R. 153 at p. 198. It was submitted that, where no connection between the outgoing and the derivation of assessable income is apparent, regard may be had to purpose in order to see whether, despite the apparent lack of connection, there is in fact one. Reliance was placed upon Magna Alloys and Research Pty. Ltd. v. F.C. of T. 80 ATC 4542 at pp. 4546-4547; (1980) 33 A.L.R. 213 at pp. 218-219 per Brennan J.; F.C. of T. v. Ilbery 81 ATC 4661 at p. 4667; (1981) 38 A.L.R. 172 at p. 180 per Toohey J. and John v. F.C. of T. 89 ATC 4101 at pp. 4105-4106; (1989) 166 C.L.R. 417 at pp. 426-427. It was argued that there was clearly a connection in this case between the outgoing and the derivation of assessable income, that the Tribunal erred in regarding purpose or motive as a criterion of deductibility under sec. 51, and that the Tribunal compounded this error by regarding the relevant question as being the purpose for which the transaction which involved the incurring of the outgoing was entered into. It was submitted that the Tribunal confused the purpose of the transaction with the purpose of the outgoing and that, even if the Tribunal had correctly found that the dominant purpose in entering into the transaction was to avoid tax,

ATC 4563

this did not necessarily disqualify the outgoing from deductibility under sec. 51. Reliance was placed by counsel for the applicants upon
F.C. of T. v. Patcorp Investments Pty. Ltd. 76 ATC 4225; (1976) 140 C.L.R. 247 especially per Gibbs J. at ATC pp. 4232-4233; C.L.R. p. 292, a passage adopted in John at ATC p. 4110; C.L.R. pp. 434-435, in support of the proposition that the presence of an anti-avoidance provision in the Act (Pt IVA in this case) makes it impossible to place upon sec. 51 a qualification which it does not express for the purpose of inhibiting tax avoidance.

The appeal was argued before us on the basis that, if sec. 51(1) applied at all, it is the first limb of the subsection that is relevant. But it was not suggested that any different considerations arose or results followed if the second limb applied. We shall therefore confine our findings to the first limb of the subsection.

In Ronpibon Tin N.L. v. F.C. of T. (1949) 8 A.T.D. 431; (1949) 78 C.L.R. 47 the High Court expounded the meaning of the first limb of sec. 51(1) at A.T.D. 435-436; C.L.R. pp. 56-57 in the following oft-cited passage:

``For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words `incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income. Their operation has been explained in cases decided under the provisions of the previous enactments: see particularly
Amalgamated Zinc (de Bavay's) Ltd. v. F.C. of T. (1935) 54 C.L.R. 295 at pp. 303-304, 307, 309-310; 3 A.T.D. 288, and
W. Nevill & Co. Ltd. v. F.C. of T. (1937) 56 C.L.R., at pp. 300, 301, 305-306, 308; 4 A.T.D. 187.

Notwithstanding the differences in other respects in the present provision, the expression `incurred in gaining or producing the assessable income' has been left unchanged and bears the same meaning. In brief substance, to come within the initial part of the subsection it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.''

In
Lunney v. F.C. of T. (1958) 11 A.T.D. 404; (1958) 100 C.L.R. 478 Williams, Kitto and Taylor JJ. said at A.T.D. p. 412; C.L.R. p. 497 with respect to the first sentence in this passage from Ronpibon:

``... the expression `incidental and relevant' was not used in an attempt to formulate an exclusive and exhaustive test for ascertaining the extent of the operation of the section; the words were merely used in stating an attribute without which an item of expenditure cannot be regarded as deductible under the section.''

Two years earlier in
Charles Moore & Co. (W.A.) Pty. Ltd. v. F.C. of T. (1956) 11 A.T.D. 147; (1956) 95 C.L.R. 344, Dixon C.J., Williams, Webb, Fullagar and Kitto JJ., when speaking about involuntary outgoings or losses, said at A.T.D. p. 149; C.L.R. p. 351:

``Phrases like... the phrase `incidental and relevant' when used in relation to the allowability of losses as deductions do not refer to the frequency, expectedness or likelihood of their occurrence or the antecedent risk of their being incurred, but to their nature or character. What matters is their connexion with the operations which more directly gain or produce the assessable income.''

Brennan J. observed in Magna Alloys at ATC 4546; A.L.R. p. 217:

``In Ronpibon Tin, supra, the Court did not explain either limb in terms of motive or purpose. The phrases `in the course of', `incidental and relevant', and `the occasion of' appear. These phrases, though not synonyms for the statutory terms, import a connection between the incurring of expenditure on the one hand and the gaining or production of assessable income or the carrying on of a business on the other.''

In our opinion the test to be applied in determining whether expenditure qualifies for deduction under the first limb of sec. 51(1) is to ascertain the ``essential character'' of the expenditure, as stated by Williams, Kitto and Taylor JJ. in Lunney at A.T.D. p. 412; C.L.R. p. 497, Brennan J. in Magna Alloys at ATC p. 4546; A.L.R. p. 217, Toohey J. in Ilbery at ATC p. 4667; A.L.R. pp. 179-180, a Full Court of this Court (Forster, Fisher and Spender JJ.) in
F.C. of T. v. Brixius 87 ATC 4963

ATC 4564

at p. 4965; (1987) 16 F.C.R. 359 at p. 361 and French J. in
Riverside Road Pty. Ltd. (in liq.) v. F.C. of T. 90 ATC 4031 at p. 4041.

The critical question in the present case is whether purpose is relevant in determining the essential character of the interest payments. The question has been considered by this Court in a number of cases: Magna Alloys per Brennan J. at ATC pp. 4545-4553; A.L.R. pp. 216-227;
Ure v. F.C. of T. 81 ATC 4100; (1981) 34 A.L.R. 237; Ilbery at ATC pp. 4667-4668; A.L.R. pp. 179-181;
F.C. of T. v. Creer 86 ATC 4318; (1986) 65 A.L.R. 485; Anderson v. F.C. of T. 89 ATC 4982 at pp. 4990-4991; and Riverside Road at p. 4041.

In Ure, Brennan J. said at ATC p. 4104; A.L.R. p. 241:

``An outgoing of interest may be incidental and relevant to the gaining of assessable income where the borrowed money is laid out for the purpose of gaining that income F.C. of T. v. Munro (1926) 38 C.L.R. 153 at pp. 170, 171, 197;
Texas Co. (Australasia) Ltd. v. F.C. of T. (1940) 63 C.L.R. 382 at p. 468). The laying out of the borrowed money for the purpose of gaining assessable income furnishes the required connection between the interest paid upon it by the taxpayer and the income derived by him from its use.''

Toohey J. cited this passage with apparent approval in Ilbery at ATC p. 4667; A.L.R. p. 180.

In Ilbery, Toohey J., with whose reasons for judgment Northrop and Sheppard JJ. agreed, said at ATC p. 4667; A.L.R. pp. 179-180:

``When the High Court in Ronpibon Tin N.L. v. F.C. of T. (1949) 78 C.L.R. 47 said at p. 56:

  • `For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end,'

that was not to exclude the notion of purpose. As Brennan J. pointed out in Magna Alloys at p. 4547:

  • Though purpose is not the test of deductibility nor even a conception relevant to a loss involuntarily incurred, in cases where a connection between an outgoing and the taxpayer's undertaking or business is affected by the voluntary act of the taxpayer, the purpose of incurring that expenditure may constitute an element of its essential character, stamping it as expenditure of a business or income-earning kind.'

Conversely, I would add, purpose may stamp the outgoing as one having no relevant connection with the gaining or producing of assessable income.''

It is clear from Toohey J.'s judgment in Ilbery that the purpose of the taxpayer was, in his Honour's view, an important consideration on the facts of that case.

Central to the case for the appellant was the argument that John is authority for the proposition that purpose is an irrelevant consideration in determining whether a loss or outgoing is deductible under the first limb of sec. 51(1). The passage from the reasons for judgment of Mason C.J., Wilson, Dawson, Toohey and Gaudron JJ. in John at ATC pp. 4105-4106; C.L.R. pp. 426-427, cited by the Tribunal in its findings set out above is sufficient to reject the argument because it is plain that by reference, with apparent approval, to passages from the judgments of Toohey J. in Ilbery and Stephen J. in Handley v. F.C. of T. 81 ATC 4165 at p. 4169; (1981) 148 C.L.R. 182 at pp. 189-190, their Honours regarded purpose as being relevant to the essential character of a loss or outgoing, at least in some circumstances. Their Honours expressed some qualification with respect to the relevance of purpose in the last sentence of the passage cited above, a qualification noted in
Raymor (N.S.W.) Pty. Ltd. v. F.C. of T. 89 ATC 5173 at p. 5179, but not of relevance to the present case.

In John their Honours were looking at questions related to trading stock and, in particular, at the principles to be applied in calculating the cost of such stock in ascertaining whether a profit had been gained to be treated as income pursuant to the Act or, alternatively, as in the case before them, a loss sustained. It was for that reason that the last sentence of the passage referred to was concerned with ``the cost of a step taken in the process of gaining, or producing, income'' [emphasis added] and their Honours' statement

ATC 4565

that such a cost ``must be regarded as an outgoing or taken into account in calculating the loss... incurred, whatever purpose or motive may have attended all or any of the steps involved'' has to be understood in that context. In John the issue for decision was whether a cost that had been accounted for in determining that a loss had been incurred as a result of a transaction was properly included as such a cost. Their Honours were not concerned with voluntarily incurred expenditure or with any question of the essential character of such expenditure. Those issues were, however, directly considered in Ilbery.

Reliance was also placed by counsel for the applicants upon the further passage from the reasons for judgment of Mason C.J., Wilson, Dawson and Toohey JJ. in John at ATC p. 4110; C.L.R. p. 435:

``By this we understand it to be argued that sec. 51 should be construed so as to exclude therefrom a loss or outgoing that has been artificially contrived by a preordained series of transactions or a composite transaction into which there have been inserted steps which have no commercial purpose apart from the avoidance of a liability to tax. If that construction is to be reached as a matter of implication then, for the reasons already given, the presence of sec. 260 precludes that approach. If it is advanced as a matter excluded by the plain meaning of sec. 51, there is no occasion to resort to any new principle of construction. We should add that on ordinary principles of construction there is no warrant for limiting sec. 51 by reference to the two quite specific ingredients identified by Lord Brightman in Furniss [a reference to
Furniss v. Dawson (1984) A.C. 474, in particular the passage from the speech of Lord Brightman at p. 527]. We would thus reject the principle of fiscal nullity as one appropriate to be adopted in the construction of the Act generally, or one appropriate to be adopted in the construction and application of sec. 51.''

This passage must be read in the context in which it appears, from which it is plain that their Honours were considering whether the doctrine of fiscal nullity is part of Australian law. They rejected the argument that sec. 51 should be construed as the vehicle for the introduction, by implication, of that doctrine into income tax law. Their Honours said that sec. 260 and Pt IVA (in a statement which preceded the passage cited above), made specific provision for what ``may be called tax minimisation arrangements'' and ``thereby excludes any implication of a further limitation upon that which a taxpayer may or may not do for the purpose of obtaining a taxation advantage''. Their Honours adopted what was said by Gibbs J. in Patcorp at ATC p. 4232; C.L.R. p. 292: ``the presence of sec. 260 makes it impossible to place upon other provisions of the Act a qualification which they do not express, for the purpose of inhibiting tax avoidance''. The passages from the judgment of Mason C.J., Wilson, Dawson, Toohey and Gaudron JJ. upon which reliance was placed by counsel for the applicants do not support the argument of counsel for the appellant.

In our opinion, in determining the essential character of an expenditure, purpose is not necessarily the criterion or test of deductibility. But in cases of voluntary expenditure, the purpose for which the expenditure was incurred may be relevant. The extent of the relevance and the weight placed upon the evidence with respect to it will vary according to the circumstances of each case. In some cases (for example Ilbery) it may be critical; but at the other end of the spectrum, where the connection between expenditure and the gaining or producing of assessable income is clear by reference to the objective facts, it may be superfluous to consider the purpose for which the expenditure was incurred.

This is not a case where the relevant expenditure was so clearly incurred in gaining or producing assessable income as to produce the plain conclusion of an actual nexus between the expenditure and the gaining or producing of the assessable income; so that evidence of purpose would be of little, if any, assistance. The purpose of the applicants and their advisers and others involved in the financial scheme is at the heart of the facts of this case. The Tribunal was therefore entitled to take into account the matters which it did, including those relating to purpose, and to come to the conclusion that the essential character of the scheme was not to gain or produce assessable income for the partners but to reduce the taxable income of the applicants. The expenditure incurred by the

ATC 4566

partnership and the resultant loss were stamped with that essential character.

It is plain that the elaborate and complex matrix of facts justified the finding of the Tribunal of ``extreme artificiality'' and that the ``whole exercise had, as far as the accountants were concerned, the dominant purpose of reducing the taxable income of their clients''.

It has not been established that the Tribunal fell into error in reaching the conclusions to which we referred earlier and the further conclusion that this is a case which ``involved expenditures incurred by a partnership for no discernible purpose other than to derive a tax deduction''.

A further attack was made by the applicants upon the findings of the Tribunal. Counsel for the applicants submitted that the Tribunal fell into error in that it purported to deny to each applicant the deductibility of portion of the partnership loss attributable to interest under sec. 51(1) rather than to consider the appeals as appeals from the Commissioner's disallowance of deductions claimed by the applicants as partners pursuant to sec. 92(2) of the Act.

It is clear that the Commissioner disallowed the claim by each applicant for a deduction pursuant to sec. 92(2) of his or her individual interest as partner in the partnership loss. It is true that the Tribunal in its reasons discussed the appeals before it with reference to sec. 51(1) of the Act, but it does not follow that the Tribunal misconceived the task before it. Plainly the Tribunal's task was to consider the correctness of the Commissioner's disallowance of the objection of each applicant, which was an objection against the disallowance by the Commissioner of each applicant's individual interest in the partnership loss, that loss being calculated after taking into account both the income derived by the partnership and its liability for interest. But, in our opinion, it is understandable that the Tribunal expressed its reasons essentially with reference to sec. 51(1) because the starting point for the availability of a deduction under sec. 92(2) is the incurring by a partnership of a partnership loss in the relevant year of income.

The partnership loss in this case is the loss constituted by the interest paid on the moneys borrowed to pay for the relevant annuity and on the moneys borrowed to pay the interest. The partnership claimed this as a loss in its partnership return and each of the applicants in turn claimed his or her individual interest as partner in that loss pursuant to sec. 92(2). Section 51(1) must be the source of the partnership loss arising from the payment of interest and this was the focal point of the Tribunal's reasons; but it is obvious that a partner's entitlement to a deduction arises under sec. 92(2) and plainly does not have as its source sec. 51(1), though that is an essential integer in the claim by the partnership in its return that it has incurred a partnership loss from which the claims of the individual applicants spring.

The appeal must be dismissed. In these circumstances it is not necessary to consider the questions raised by the Commissioner in his notice of contention with reference to subdiv. D of Div. 3 of Pt III and sec. 177F of Pt IVA of the Act.

We would dismiss the appeal with costs.

THE COURT ORDERS THAT:

1. The appeal be dismised.

2. The applicants pay the costs of the respondent of the appeal.


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