J C Williamson's Tivoli Vaudeville Pty Ltd v Commissioner of Taxation

(1929) 42 CLR 452
(1929) 36 ALR 14
(1929) 3 ALJ 276

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(Judgment by: Isaacs J.)

J C Williamson's Tivoli Vaudeville Pty Ltd
v Commissioner of Taxation

Court:

Judges: Knox CJ

Isaacs JRich J
Starke J

Hearing date: 11 October 1929
Judgment date: 7 November 1929

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Judgment by:
Isaacs J.

This case has been twice argued, but without convincing me on either occasion that there is the least substance in the taxpayer's contentions. Those contentions may be conveniently reduced to two. First, that Spargo's Case, 8 Ch App 407, applies whereby it must be taken in law that £170,000 in cash was paid by the Company. Next, failing the first, that the value of £170,000, being the agreed value or the nominal value of the shares, must be conclusively assumed to be their true value, or what comes practically to the same thing, must be accepted by the Commissioner or board as prima facie their true value, leaving the Commissioner, if he can, to prove the contrary.

The first point is distinctly and directly covered by consistent authority of the most eminent character. The second is supported by no statutory provision or relevant authority, is opposed to the very essence of the income tax legislation, and particularly to the provisions of the proviso under which the claim is made, and appears to me to be unjust to the general body of taxpayers.

The material facts are easily compressible. Mr Musgrove promoted a Company with a nominal capital of £250,000, in 250,000 shares of £1 each, and he assigned to the Company certain leases having ten years to run, for a consideration, part of which is stated to be £170,000, to be paid and satisfied by the allotment to him or his nominees of 170,000 fully paid-up shares in the Company, which he duly received. With the exception of two other shares, these are the only shares issued. The Company claims as a right under the proviso to subs (i) of s 25 of the "Income Tax Assessment Act 1922-1925," a deduction of £17,000, for the relevant financial year. and rests on the two contentions I have stated.

1. Spargo's Case (above). -- Nothing could be more distinct than Spargo's Case and the present case. In Spargo's Case the shareholder subscribed for contributing shares, and owed the Company the whole subscription money, which could have been sued for. On the other hand, the Company, by an independent agreement, bought his property and owed him the price in cash as a debt. The court allowed the two pecuniary debts to be set against each other, and each debt was paid in cash without the form of passings, the money backwards and forwards.

That is the way also in which the Privy Council viewed the matter in Larocque v Beauchemin, (1897) AC at p 364, namely, the existence of two independent agreements, each creating a liability to pay presently in cash. Such an agreement as the present, said Lord Macnaghten, he regarded as contravening a Statute requiring shares to be paid for in cash.

That pronouncement, which in itself is sufficient to exclude Spargo's Case (above), is only the recognition of a very distinct series of decisions dating back sixty years. In 1879 White's Case, 12 Ch D 511, was decided by James, Brett and Cotton, LJJ., which, if sound law, leaves as to both contentions no loophole of escape in the present case. There a newspaper proprietor did work for a company, and made a money claim against the company in respect of part of which, £30, they issued to him by agreement six fully paid-up shares of £5 each. No contract was filed under s 25 of the Act of 1867, so that it became a question of whether in law there had been a cash payment for the shares.

It would be impossible, I think, to find a case more directly in point or more decisive. James, LJ, said (p 515) --

The bargain was that Mr White should accept payment in shares, and must not look for cash. Therefore there never was that money demand which was capable of being, I do not say set off in the ordinary legal sense, but set off by the parties meeting and agreeing to put debt against debt. That being so, it seems to me utterly impossible to bring the case within Spargo's Case.

Brett, LJ (p 516) said --

Now he has not actually paid for these shares in cash. He did not take any money out of his pocket in cash and pay for these shares. The only question, therefore, is whether there has been a transaction which is equivalent to a payment in cash in point of law.

Then (at p 519), having examined the contract and found that on its fair construction White was to be paid in shares and shares only, he says --

For a breach of the agreement on the part of the Company the action would not be for a money demand at all, the action would be for a breach of the agreement to deliver shares, and on a non-delivery of shares, the damage would be the value of the shares.

Therefore, in his opinion, Spargo's Case (above) was inapplicable.

Cotton, LJ, said (p 520) that the matter had to be dealt with as a matter of substance, and said --

What in substance was the real contract and agreement between White and Company: the only point which is material being this, whether or no under that contract any money ever became due by the Company to White ... He was to have nothing from the Company except fully paid-up shares, that is to say, the Company wishing to start itself, said to him in substance -- 'If you will take fully paid-up shares, on which you are to be subject to no call, you shall advertise for us, the shares being given to you in consideration of your doing work.' ... He bound himself to accept, as the Company were also bound to give, shares, in consideration of his doing the work.

That established that the shareholder owed no debt to the Company. Then on the other side the learned Lord Justice said there was really no debt of the Company to White.

I invite attention to the last quoted words of the Lord Justice, and those about to be quoted, when we come to the question of value. As if anticipating one main argument in the present case, the learned Lord Justice refers to the money account that was rendered to the Company, and he says --

It was for the purpose of ascertaining what quantity of fully paid-up shares should be allotted to White in the Company. It was not, in my opinion, referred to ... as recognising the liability on behalf of the Company to pay cash, but it was merely for the purpose of ascertaining the quantum, as a measure of the number of shares that were to be allotted to this gentleman as fully paid-up shares.

So there was no debt by the Company either, because the Company was never bound to pay money.

In Arnot's Case, 36 Ch D 702, in 1887, another court of Appeal (Cotton, LJ, Bowen, LJ, Fry, LJ) had to consider a question greatly canvassed in this case, namely, the effect of a promise to pay a stated sum of money to be paid by paid-up shares. Referring to what is in fact the doctrine of Spargo's Case (above), Cotton, LJ, at p 706, said --

In my opinion it would be wrong to apply that principle to a case where the only transaction which is claimed to amount to a payment in cash is an agreement to be paid in shares, which is embodied in the same resolution as that which allots him the sum in respect of which he is to take the shares.

Bowen, LJ, said, unless paid-up shares were given, the Company would not fulfil their contract. Fry, LJ (at p 714), said -- "I think it plain that a mere agreement to give money, contemporaneous with an agreement to take shares, cannot be a payment in cash."

In Roberts's Case, 2 Megone 60, there was an agreement between vendors to a Company and the Company, the second clause stating the consideration as £3000. Clause 4 provided that the £3000 should be paid £1000 in cash and £2000 in fully paid shares. The shares were allotted. No contract was registered. Held, by Stirling, J, that the shares had not been paid for in cash. Spargo's Case (above) was cited. White's Case (above) was acted on. Mr Buckley, of Counsel, referred to Lord Selborne's decision in the New Zealand Kapanga Gold Mining Company, LR 18 Eq 17, which was to the effect that in such circumstances the shares were not paid up in cash. In Credit Company v Pott, 6 QBD. 295 at 298, Lord Chancellor Selborne restated the Spargo doctrine. The distinction where independent agreements exist, each resulting in a purely money claim, is at the root of the matter, as shown by Larocque's Case already mentioned, and Re Barrow-in-Furness Investment Company, 14 Ch D 400. In Re Johannesburg Hotel Company, (1891) 1 Ch at 132, Fry, LJ, observed that the contract to take paid-up shares in payment of property does not raise cross pecuniary debts, which to avoid circuity may be used to extinguish each other mutually, and so work a virtual payment in cash. And the learned Lord Justice said -- "A contract to take fully paid-up shares creates a liability to take the shares, but no liability to pay money, and no debt under any circumstances." Buckley on Companies (7th ed ) at 600, and (8th ed ) at 635-6, shows that unless calls are due on the shares, the Spargo doctrine cannot operate.

During the argument reliance for the taxpayer was placed on Palmer's Precedents. The reference is adverse. In the fifth edition (1891), at p 99, after citing s 25 of the Act of 1867, this is said --

Hence, whenever an agreement provides for the issue of paid-up shares or partly paid-up shares as the consideration or part of the consideration for property or rights sold or services rendered to the Company, the agreement should be duly filed pursuant to the above section before the shares are allotted, otherwise the allottee will be liable to pay the nominal amount thereof in cash.

The form 15, at p 113, undoubtedly contemplates a contract in the form as in Roberts's Case (above), but there is appended a cautionary note as to registering the contract, and referring back to p 99, a note scarcely necessary. The quotation from p 99 is repeated at p 130 of the sixth edition, the last before the repeal of the 25th section of the Act of 1867, and at p 134-5 the cases I have cited up to 1895 are mentioned, with others to the same effect. There is nothing contrary to this in the Bullfinch Case, 15 CLR 443 , 18 ALR 567 . I cannot there find any statement that the consideration was payable or was paid "in cash," or that a pecuniary liability or debt was created. Spargo's Case (above) was never mentioned, nor had the court any concern with what we are considering here. What was held, rightly or wrongly, was that the amount of the consideration was for the purposes of the particular Act to be taken at the agreed amount, £400,000. Two members of the court (Griffith, C.J, and Barton, J) based their decision avowedly -- see p 447 -- not on the cash price mentioned, but on the nominal value of the shares being taken conclusively as their value. I am not concerned with the accuracy of that decision as applied to its circumstances, for in my opinion it has no relation to the point we have to consider. I am not at present prepared to assent to it. If it is in conflict with the cases I have cited, it is certainly erroneous, and sitting here it would be our duty to say so. I leave that case out of consideration for present purposes.

2. Money or Money's Worth. -- Spargo's Case (above) being inapplicable, for the reason that no debt on either side existed, it follows that the only property in fact and in law given for the assignment of the leases was shares in the Company. In addition to the facts set out in the transcript, the full text of the agreement, copies of which were handed up to the court during the argument, discloses another clause of some materiality as confirming the view I take of the facts as stated. Clause 4 says --

The purchase shall be completed on or before the thirteenth day of April, 1921, when the Company shall allot and issue fully paid up the said 170,000 shares to the vendor, his executors, administrators or assigns, or as he or they shall direct. Upon the allotment aforesaid being made and from time to time thereafter the vendor, etc, shall ... execute ... such transfers,

& c. Not a word of obligation as to £170,000, but solely as to 170,000 shares. Plainly the consideration was, both in law and in the actual contemplation of the parties, the shares and not the money. The Commissioner contends at the threshold that such a transaction is outside the proviso, since the words "amount" and "paid" and "sum" connote money.

The question is not free from doubt. But on the whole I apply to this branch of the case the "substance" doctrine of Spargo's Case (above) and other cases such as Potts' Case (above). Spargo's Case, as Lord Cozens-Hardy said in Parsons's Case, (1916) 2 Ch at 530, is only an illustration of a principle. That is, I treat as "money" whatever was the amount of money that it is considered could on the day of the "payment" have been realised by selling the shares. That and that alone can be the "money's worth" that was then given. In that sense only I agree with the case of Sampson v Commissioner, 26 SR NSW 437. And that is obviously the sense in which the Supreme Court understood the matter, for there the court was careful to note that the actual value of the shares was proved as at the date of allotment to be the same as their nominal value.

If no one, not even the respondent, would have given £170,000 cash for the shares as a business proposition on that day, then that "amount" was not paid. Rigby, LJ, in McIlquham v Taylor, (1895) 1 Ch at 64, said --

What does 'worth' mean? It means worth in the sense of the real value to be ascertained in some manner. There can be no difficulty in ascertaining it; it does not mean nominal value. A thing may be of the nominal value of £100,000, or, as in this case, £1000, and yet not be worth a farthing.

The learned Lord Justice was there speaking of shares in a company.

3. Value of Shares. -- With respect to the conclusiveness of the agreed value of the shares, or their nominal value, the Crown cannot, as I conceive, even apart from any special statutory provision, be for a moment bound by some arbitrary value, however honest it be for mistaken it may still be, that parties for their own inscrutable purposes choose to affix to property. Still less, when in a case like the present, a man simply declares for himself, and for his own purposes, there being no bargaining whatever. In this case, instead of £170,000, the figure might as well have been doubled, and would then have had no less efficacy in the taxpayer's favour.

Hunter v Rex, (1904) AC 161 , is a clear authority based merely on general principles that where income tax deductions are claimed, the reality and not the conventions of the parties must prevail. Payment as between them is not necessarily payment where the Crown revenue is concerned. See particularly per Lord Robertson and Lord Lindley. There is the strongest inherent reason for not permitting any but actual and real deductions in income tax assessments, and for requiring when disputed that the taxpayer claiming them, and alone in a position to do it, should give the necessary proofs. Especially is that so when the claim is for an exceptional immunity, as in the present case. Whether what is given in payment is money or money's worth, its true value, and not its alleged value, is all that the taxpayer can rightfully claim as a deduction under this proviso.

I discard all theories and fictions and rules laid down in cases for quite other purposes having no real relevancy to the purpose of this proviso. I regard it as a plain business question, which the Commissioner or the Board, as the case may be, has almost in the very words of the proviso to consider, namely: How much money in coin, or in a form then convertible into coin, has it been proved to his or their satisfaction that the taxpayer actually gave for the assignment of leases? Company cases of the type of Re Wragg Ltd, (1897) 1 Ch 796, may be at once put aside as altogether irrelevant. In the first place, the agreed value of what is accepted by the Company in payment of shares is upheld only "as between the Company and its shareholders" -- see, per Lord Cairns, in Burkinshaw v Nicolls, 3 AC at 1016. Creditors have no greater right to complain than the Company -- Baglan Hall Company, 5 Ch App at 357. It is a mere question of considering as between the parties whether the contract was intra vires the Company.

In the next place, the type of cases referred to are concerned only with the value of what the Company has received for its shares, and not the value of what the Company has given, namely, the shares themselves. In other words, the question here is: "What has the taxpayer given out of his resources?" The Company might be on the verge of insolvency, still its shares, if issued, would have to be property paid for to comply with the Companies Acts. Their value, however, when fully paid for, might be less than nil. Cases where the Crown claims taxation of shares on a value exceeding their nominal value are not in point. The party maintaining the affirmative must prove it, but he cannot prove it by manufacturing his own evidence. The cases relied on are altogether out of place in the present connection.

It is plain, from what Cotton, LJ, said in White's Case (above), that when the terms of this contract are considered, we cannot either in solid fact or in law take the £170,000 as the real consideration for this purpose. That sum fulfilled its purpose as the "quantum" of the shares. The shares were the "consideration." cll 2 and 4 of the contract, read together, leave no doubt of that. Therefore it would be wrong in any event, and looking at the matter broadly, and even were there no controlling words in the proviso itself, to presuppose, as a matter of law, either conclusively or prima facie, that the value of £170,000 was paid. Whether it was or not depends entirely on whether the shares were actually worth that sum.

There is, however, a third and overriding reason. Putting aside all artificial expedients and all doctrines adopted for quite other purposes, we have to come to the one true source of information and guidance, the Act itself. Section 23 takes the whole assessable income as a basis, and then directs deductions of losses and outgoings in producing that income, but excludes capital outgoings. Sometimes deductions specified are directly described. Others are either left to the judgment of the Commissioner or are dependent on his being satisfied of some circumstance. Section 24 allows a special deduction. But s 25 is a negative section. It forbids certain matters being allowed as deductions "in any case." So far the prohibition is absolute. There is, however, as to some of those matters one possible relaxation, and one only. That is, where something is established to "the satisfaction of the Commissioner," he "may" allow a deduction.

Now, one of the items expressly prohibited by s 25 as a deduction is -- "(i) Any wastage or depreciation of lease or in respect of any loss occasioned by the expiration of any lease." Then comes the permitted relaxation by way of proviso. The only relevant deduction possible is one that "the Commissioner may allow as a deduction," namely, the stated annual proportion of "any amount for the assignment or transfer of premises ... used for the production of income." But the express condition on which the Legislature has insisted before such a deduction is even permissible is that "it is proved to the satisfaction of the Commissioner that the taxpayer has paid" the "amount." Then and then only is the Commissioner at liberty to allow a deduction, which is by dividing "the sum so paid," etc. How, in the face of that very explicit language, any court can compel the Commissioner or the Board to be satisfied in such circumstances as we have here, passes my comprehension.

Proved" and "satisfaction" are not used technically, but with reference to administration. The proof which the Commissioner or the Board is to require is such as an ordinary fair-minded and prudent man holding a position of public trust in relation to the Treasury would require. The "satisfaction" is such a degree of assurance or conviction that he would desire to reach after the examination of the proof offered, as would lead him to act upon it as true if his own interests were at stake. If he would not be satisfied, supposing his own interests were involved, he would not fulfil his public trust if he were to cast the burden on the Treasury. Would any such fair-minded and just man in his own affairs accept mining scrip at its face value without more? Or the scrip of some unknown trading company? Would he in such a case say -- "Until the contrary is proved I will act on these shares being worth their nominal value"? Certainly not. To come a little closer. Would such a man, taking up the contract and scrip in this case, and without more, for that is the proposition, that is, without any reliable information as to the value of the property, or the property of the Company, be content in his own affairs to accept the shares and set off £17,000 a year against them? Would a banker, or any other prudent man? Assuming the man or the banker to be sane, I should unhesitatingly answer in the negative. Such blind trust -- for what is here euphemistically called prima facie value is nothing else -- is not what the proviso means by "proved to the satisfaction," etc, and in my opinion would work a great wrong to the Commonwealth.

In truth the office of the proviso is not far to seek. A premium for a lease, or the price of the assignment of a lease, was not previously allowable as a deduction at all, because it was regarded as a capital outlay -- s 23 (1) (a); Watney v Musgrave, 5 Ex D. 241, 1 Tax Cas. 272; Gillatt v Watts, 2 Tax Cas. 76; Inland Revenue v Strump, (1925) Scots L.T. 487. It was well known that sometimes injustice was done. The line between capital and revenue expenditure in such a case is often very fine. No rigid rule can discriminate, and I agree with what Lord Cullen and Lord Sands said in Strump's Case (above), that a payment of a premium for a lease may be substantially a capital or substantially a revenue outlay. The purchaser of an hotel lease with ten years to run and carrying a rental of £40 a week might pay £10,000 for the assignment as a capital outlay, or at all events for some reason beyond the rental value. If, however, the true rental value was then £60 a week, the price might well be regarded as a revenue expenditure.

There is no doubt the proviso was intended to meet the difficulty in some way. Whether it does that so flexibly as to enable the Commissioner to distinguish between true capital and true revenue outlay I need not now consider. That may well receive further consideration by the Legislature. But certain points are beyond any possibility of doubt. First the proviso is an exception to two positive prohibitions, one in s 23 and the other in s 25. Next it is couched in permissive terms only, the word "may" being used in marked contrast to "shall" used elsewhere. And most of all, the Legislature, as an essential condition precedent to even the permission given to the Commissioner to allow a deduction, has required the applicant for the deduction to prove to the Commissioner's "satisfaction" that the "amount" has been paid. Amount must mean a pecuniary amount; it sounds in money. Scrip may be most elegantly printed, but it may be as valuable as a French Assignat, or a certificate of a share in a paper goldmine.

If the Commissioner or the Board in this case, on mere presentation of the contract and the scrip, decline to be "satisfied" without some affirmative evidence that the scrip was worth in cash £170,000, what right has this court to say, "You must be satisfied, unless the contrary is shown"? The true position is that Parliament has placed reliance in the first instance on the Commissioner, and finally on the Board, in respect of business judgment and practical experience, and has therefore made the administrative "satisfaction" the test of whether any deduction may be allowed.

As to substantive law, provision is made for the assistance of this court, but to require the substitution of legal practice for administrative methods based on practical experience is, in my opinion, a usurpation of function, as well as an error of law. What criterion of real value is a mere statement in printer's ink when third parties are concerned? A theatrical venture like the one before us may have all the potentialities of good fortune, or may from its birth be on the road to liquidation. Shares in such a venture are not like Commonwealth bank notes; they are not money; and before permitting them to be taken as money, corresponding with the actual money income against which they are to be set in arriving at the assessment of taxable income, the Act requires the taxpayer to "prove" the true "amount," ie, of money. How is it possible to work the Act otherwise?

Suppose, for instance, Jones, carrying on a more or less hazardous business, is making a net taxable profit of £10,000 a year. He looks ahead, and perhaps for the purpose of "walking outside" the "Probate and Estate Duties Act," floats a company of £250,000 nominal capital in 250,000 shares of £1 each. He assigns his lease having ten years currency to the company for a stated sum of £100,000, to be paid and satisfied by 100,000 shares of £1 each paid up. All the rest of the shares except six are unissued, the six being issued to his nominees. If the present taxpayer's contention is correct, then, instead of contributing to the revenue on an income of £10,000 a year, he almost necessarily contributes nothing, because the income is in law obliterated by the deduction, unless the Commissioner can succeed in either proving some fraud or undervalue. I say "he," because that is the substantial truth. Except for a few formalities, all goes on as before. Not a penny piece has passed. True, the name has changed from "Jones" to "Jones Ltd," and Jones, instead of "owner," is "governing director," and though the tree in law belongs to Jones Ltd, the fruit is plucked by Jones. Other persons receiving a more humble income have to contribute to the general expenses of the community, and all the more if Jones goes free.

Is the Commissioner compelled to accept without question the value assigned to the shares by Jones -- because we know the Company in that respect is only a nominis umbra -- or, what may be practically the same thing, is he compelled to admit it unless he can prove to a tribunal all the ramifications of the business in order to show the real value is less? Of course, the genuineness of the assignment is not in question -- Salomon v Salomon, (1897) AC 22 ; and there is nothing illegal in walking outside Acts of Parliament -- Levene v Inland Revenue Commissioners, (1928) AC 217 at p 227. No one suggests the undoing of the bargain. It stands intact and unchallenged as between the parties just as they made it. Any taxpayer, even in an ordinary case, alleging either to the Board or to the court, that the Commissioner's assessment is wrong, must prove the error. Section 39 says so. And common sense dictates the same thing, since the taxpayer knows, or ought to know, more about the matter than the Commissioner or the Board can possibly know, even after questioning the taxpayer. For instance, how can the Commissioner in this case go back to 1921 and collect evidence as to the business chances of the theatrical enterprise launched by Musgrove, as to the artists here and abroad, the pieces, the copyrights, the salaries and all the thousand speculative elements that entered into the venture at that time, and then give evidence as to the pecuniary value of shares not in the market and not publicly issued. In the case, say, of a proprietary company, shares are never on the market.

It seems to me, even apart from the very special wording of the proviso, much more consonant with justice that, if the Company and Musgrove really appraised the shares on a business value footing at anywhere near their nominal value, the Company, or Musgrove, is the party to give some information of the process and the facts on which it was based, to be checked by the Department as best it can. Otherwise, the Act will prove unworkable, through technicalities. It is common knowledge that the raison d'etre of the Board was to get free from technicalities and to rely on business methods and experience. The Board should, in my opinion simply be told that the value of the shares for present purposes is what was their real value when contracted for or allotted, that they should ascertain this value as best they can, by their own methods, in a fair business way as business men would do it, free from all technical legal rules. And they might be told, as is the case, that if they thought fit, they would do nothing contrary to law in looking to the taxpayer as the person having all available means of knowledge to satisfy them that the real value of the shares was the sum of £170,000 in cash, that the taxpayer alleges and claims to deduct from the income on which it otherwise is bound to pay income tax in common with the rest of the community.

I therefore cannot agree with the result arrived at.