Eisner v. Federal Commissioner of Taxation.

Judges:
Walsh J

Court:
High Court

Judgment date: Judgment handed down 5 February 1971.

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Walsh J.: In his return of income for the year which ended on 30 June 1959 the appellant, Moses Eisner, showed as his income a salary of £5,000 paid by Arcos Products Pty. Ltd. and certain dividends. Deductions which were allowed left a taxable income of £3,768. In March 1960 tax was assessed on that income. But on 5 January 1966 an amended assessment was issued, upon a taxable income increased by £40,302, which was described as profit from sale of land at Elizabeth Bay. The appellant disputes that that sum or any part of it was properly included in his assessable income for the year in question. He bought land in May and June 1958 and he resold in December 1958 at a

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much higher price. But he says that no part of what he received was income. The respondent Commissioner contends that there was a profit which was income according to ordinary concepts and that there was a profit which was properly included in the assessable income by force of each of the branches of sec. 26(a) of the Income Tax Assessment Act 1936-1959 (Cth)(the Act).

A great deal of evidence was put before me. I think it would not be useful to attempt to review fully all the details of the evidence and all the submissions made concerning discrepancies or improbabilities contained in it. I think that the decision of the appeal depends upon the question whether or not the property was acquired by the appellant ``for the purpose of profit-making by sale''. As will appear, I do not accept the alternative claims made on behalf of the respondent. The appellant has sworn that the property was not acquired for the purpose of profit-making by sale. I propose to refer to the aspects of the evidence appearing to me to be of most importance as providing support for his claim or as casting doubt on it. It will be necessary to refer also to some questions of law as to the construction and effect of the relevant provisions of the Act and as to the admissibility and the use which might properly be made of some portions of the evidence.

The appellant controlled several companies which in the evidence were called the Arcos group. They were engaged in extensive undertakings including the construction of power stations. A company called Gen Pty. Ltd. (herein called Gen) which the appellant controlled and in which he and members of his family were shareholders was a principal shareholder in the Arcos companies. One company in the group was engaged in real estate ventures. This was Wolseley Gardens Pty. Ltd. It owned a block of flats at 25 Wolseley Road, Point Piper, which had been erected in or about 1955 by one of the Arcos group. It became also the owner in March 1958, by transfer from the appellant, of land at 126 Wolseley Road upon which later flats were erected by an Arcos company. These were described in the evidence as maisonettes.

On 1 May 1958 the appellant entered into a contract to buy from one MacCarthy for £12,200 land at 110 Elizabeth Bay Road. On 24 June 1958 he entered into a contract to buy from one Hixson for £35,000 land at 108 Elizabeth Bay Road. On 17 November 1958 a company called Oceana Apartments Pty. Ltd. (herein called Oceana) was incorporated. The appellant caused this to be done. On 1 December 1958 the appellant entered into a contract to sell both lots of land at Elizabeth Bay Road. The purchaser was Oceana and the price was £100,000, expressed to be payable by a deposit of £10,000 and as to the balance in cash on completion. It is the excess of that sale price over what the land cost the appellant, allowing for various expenses incurred by him, that is claimed by the respondent to be taxable. After the sale of the land to Oceana an Arcos company constructed home units on it for sale. The appellant said in evidence that he did not receive the price in the manner for which the contract provided but received it from time to time as money became available from the sale of the home units. However, according to documents which were tendered in evidence (Exhibits V and W) the sum of £100,000 was deposited in the appellant's bank account as the price of the land on 19 December 1958. That sum was then lent by him to Arcos Industries Pty. Ltd. The evidence does not disclose from what source came the money with which the appellant was paid. There are notations in Exhibit V which indicate that when the land was purchased from McCarthy and from Hixson the price was paid by cheques drawn by the appellant on his own bank account but really with moneys borrowed from Gen and deposited in his account to meet the cheques.

Whatever was the source of the money which the appellant received as payment, he does not dispute that he received the price of the land and does not set up any case that in the purchase and in the resale of it he was merely an agent and not a principal. The respondent on his part has treated the appellant as having bought and sold the land on his own behalf and as having paid for it and received the sale price of it. It is on that basis that the assessment under appeal has been made. I do not doubt that it is proper to take into account that in the events which happened gains were made or at last there were prospects of gains being made by the Arcos company from the erection of the building and by Oceana or by Gen and the Arcos companies which acquired the shares in Oceana. There was evidence that Arcos Industries Pty Ltd received shares as payment for building work and afterwards sold these to persons who acquired units in the building. But the questions raised by this appeal are not questions concerning income derived by any of those companies. They are questions as to income said to have been derived by the appellant himself. So far as the first branch of sec. 26(a) is concerned, the facts that, as things turned out, the purchaser from the appellant was a company formed on his instructions for the purpose of buying and developing the land and that it was then intended to be developed in a way which benefited another company in the Arcos group must cause the appellant's evidence to

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ATC 4024

be viewed with suspicion and to be scrutinised even more closely than if the sale had been made in the open market to a stranger. But those facts cannot in themselves attract any liability under the first branch of sec. 26(a).

The appellant's evidence was to the effect that before he bought the land he had decided to buy land and cause to be erected on it fifty to sixty flats which were to be retained by him and to be let to tenants. These were to provide for himself and for the benefit of his family a permanent investment, independent of his interests in the Arcos companies and of the success or failure of their ventures. He had considered how such a project could be financed. He had available to him about £75,000 as his own capital and he was prepared to pay up to that amount as the price of suitable land. He would seek to obtain a long-term loan of £300,000 from The National Mutual Life Association of Australasia Limited (herein called National Mutual). He expected to obtain in addition £50,000 or thereabouts from his bank. Before the land was bought he had interviews with representatives of National Mutual and he regarded himself as being assured of obtaining the required loan from that company. He had also seen the bank manager Mr. Alexander who was prepared to provide additional finance. He had at the inception of the plan discussed it with Mr. Kuner who was his brother-in-law and the manager of the Arcos companies. According to Kuner the appellant came one day at a later time to the office to say that National Mutual had agreed to lend him the money and this ``caused quite some jubilation''. The appellant consulted Mr. Dudley, an estate agent, and requested him to seek suitable land which the appellant might buy. The contract with MacCarthy was made but it proved difficult to obtain the adjoining land from Hixson. But after it had been put up at auction and passed in, Hixson agreed to sell for £35,000. Having obtained the land the appellant proceeded to prepare the way for the erection of the building. He asked an architect Mr. Fry to produce sketches of a building and later to prepare plans and to apply to the City Council for development approval. Application was made on 14 July 1958 for approval for the construction of fifty-seven flats and approval was given on 28 August 1958. The appellant asked an engineer Mr. Docker, with whom the Arcos group had had dealings, to advise as to the structural design and to make structural drawings and computations. The appellant arranged for some estimates of work to be prepared by a person employed in the Arcos group and then checked these. The appellant says that he compiled a document (Exhibit G) in relation to the estimated costs of the work. I shall discuss that document later. When all these steps had been taken the plan seemed ready to be carried into effect. But it was destined to suffer a common fate of well-laid schemes. When application was made to National Mutual the expected loan could not be obtained. The formal application was made on 10 October 1958 (Exhibit K). It was for a loan of £300,000, to build fifty-seven flats. The applicant's estimate of the value of the property as stated in this application totalled £600,000, made up of land £50,000, buildings £490,000 and ``other improvements'' £60,000. A letter of 17 October 1958 informed the appellant that the loan was refused and said that a loan not in excess of £150,000 could perhaps be considered. The appellant wrote a further letter on 21 October and claimed that he had laid out considerable money because during his first interview several months earlier he gained the impression that the company would consider ``a loan of £300,000 or 50% of the valuation of the security''. He asked that the decision be reconsidered. The company wrote on 23 October to say that it could not be altered. The dates of those communications are of interest. There is evidence which proves that at least as early as 14 October and probably some days before the plan to incorporate Oceana and to dispose of the land to it had already been formulated. On 14 October a brief to advise was given to counsel by the appellant's solicitor. From the advice, which was given in writing on 20 October, it appears that counsel had been instructed that National Mutual had refused to lend £300,000 and that the appellant proposed to sell the land to a company to be formed called Oceana Apartments Pty. Ltd. This is inconsistent with evidence that, after the appellant had received the letter of refusal, he investigated the question whether it was practicable to continue with his project in a modified form and worked out the estimates, which appear on Exhibit G, as to what could be done on the basis that a loan of only £150,000 could be available. The appellant says that he had a discussion with Kuner and it was then that the idea of building home units for sale first arose. However, I am of opinion that a conclusion should not be reached, simply because of those inconsistencies, that the appellant always intended to sell to a home unit company to be formed by him or that he had made up his mind to do this before he received any information as to what National Mutual's attitude to the loan application would be. I think it is probable that at some time earlier than the date of the written refusal the appellant received verbal advice from Mr. Laurent, the manager of National Mutual, as to the result which the application was likely to have. This view receives support from evidence given by

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Laurent himself and also from evidence given by Kuner.

In the new project, which according to the appellant replaced in October 1958 the project which until that time he had intended to carry out, it was possible to use the plans, drawings and calculations which had already been prepared or made, although some modifications occurred which are of no present relevance. It was easy for the appellant to arrange for an Arcos company, which would have carried out the building work for him if he had continued with his own project, to obtain a contract to build from the home unit company. To an outsider who had observed demolition work and other preparatory work being done on the site and had then observed later the building in the course of erection it would not have appeared that one project had been replaced by a different one. If he had been told that the land had been bought in the appellant's name but was to be transferred to a company formed by him and be given a structure appropriate to a company owning home units, no doubt he would have assumed that this was a normal way of promoting a home unit project. He would have supposed that the land had been bought with that transfer in contemplation or at least that that had been envisaged as one of the methods by which the purchase of the land might lead to the making of profits. But the appellant's case is that until October home units were never in contemplation. Nor was the sale of the land. His intention was to keep it and to obtain the rents from the flats from which the money borrowed to finance the venture could be paid off gradually. This income-producing asset would be of value for himself and for the benefit of his family, particularly after his retirement from business activities or if they should not continue to prosper.

If the appellant's case had to depend solely upon his own testimony to establish to my satisfaction the essential facts as to the state of his mind when he entered into the contracts with MacCarthy and with Hixson the appeal would fail. He carries the onus of proof. Having regard to evidence as to his previous experience in the use of companies and in the acquisition of companies with tax losses and to evidence of other occasions upon which he had acquired land initially in his own name and to many other circumstances in the case, I thought that his version of what occurred ought to be regarded as highly suspect. It was, in my opinion, demonstrated quite clearly that some statements in his evidence which were made quite positively and even dogmatically were contrary to the facts. Such was a statement that he had a definite promise from the bank manager Alexander to lend him £50,000 for his project of erecting the flats. Even if the defects in his own evidence were thought to be attributable solely to faulty recollection or to misunderstandings, they would cast such doubt on his reliability as a witness that in my opinion the essential facts in his case would not be found to have been proved by his evidence, standing alone. But it does not stand alone. In my view it obtains very considerable support (not in all its details but in its substance) from other evidence in the case. To some of that evidence I must now refer.

Evidence was given by several persons who took part in relevant events or discussions during the year 1958. The witnesses included Mr. Kuner, Mr. Dudley the estate agent, Mr. Laurent of National Mutual, Mr. Docker an engineer and Mr. Black an accountant. Some of these men spoke of acts done by them on the instructions of the appellant. Most of them gave evidence of conversations in which the appellant stated his intentions in relation to the acquisition of the land and in relation to the nature and purpose of the buildings to be erected on it. A question arose as to the admissibility of such evidence. It was submitted for the respondent that self-serving statements made out of Court by the appellant could not be evidentiary in his favour of the facts of the case. Counsel referred me to the statement of Windeyer J. in
Petrie v. F.C. of T. (1966) 14 A.T.D. 234. He submitted that, except to the extent that words which accompanied an event might serve to explain that event, the words used by the appellant to his agents or advisers could not be treated as evidence of his purpose. But, in my opinion, the test suggested in Petrie's Case cannot be used in every case to define the limits within which evidence of contemporaneous statements of intention or purpose may be given. I do not think I need trouble in this case to distinguish between intention and purpose. I think that a finding as to what the appellant intended to do with the land, at the time when he bought it, would be directly relevant to the question of purpose which arises under the first part of sec. 26(a). General statements may be found that whenever a person's intention is a matter in issue, evidence may be given of declarations made by him of his intention: see Halsbury, 3rd Ed., Vol. 15, pp. 281 and 288-290;
Lloyd v. Powell Duffryn Steam Coal Company, Limited (1914) A.C. 733 at pp.751-752; In
re Wright (1920) 1 Ch. 108; and
Nash v. Commissioner for Railways (1962) 63 S.R. (N.S.W.) 357 at p. 360. But I think that the circumstances of each case need to be considered in applying the rule that evidence may be given of statements of intention. I think that it is not confined strictly to statements which are part of the res gestae or are contemporaneous with the relevant act: see In
re Fletcher (1917) 1 Ch. 339 at p. 347. But I must keep in mind the statement of

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Dixon J., with whose judgment Rich, Evatt and McTiernan JJ. expressed agreement, in
Williams v. Lloyd (1933-34) 50 C.L.R. 341 at p. 371. His Honour said: ``Ex post facto statements of a narrative order are not admissible upon the state of mind at a past date of the person who makes them.'' In the present case some of the statements of which I allowed evidence to be given were not statements by the appellant referring directly to the intention with which he bought the land but were statements as to his intention as to the nature of the project for which it was to be used. But although it is the former intention or purpose which is in issue the latter statements may be admissible, in my opinion, whenever they appear to be capable of throwing light upon the matter which is directly in issue: cf.
Elsey v. F.C. of T. 69 ATC 4115; 43 A.L.J.R. 415 at p. 418. I think that those parts of the evidence of intention upon which I have placed reliance were admissible even if some other parts of it were not.

Some of the evidence of this kind was of little weight. For example, I received little assistance from the evidence of Mr. Dudley relating to the purpose for which the appellant said he wanted the land. I do not think Dudley was a dishonest witness, but I do not place much reliance on his account of the circumstances in which he was requested to act for the appellant. I do not think he had a clear recollection of what took place. It may be added that it is one of the oddities of the appellant's story that, having at that time no interest at all in home units, he should have engaged the services of Dudley, after a casual meeting. Dudley was a ``home unit specialist'', with no experience and no interest in the letting of flats, although the appellant says he believed Dudley to be experienced in this respect. According to the appellant but not according to Dudley, the assistance of Dudley was obtained when the appellant was working out the rentals which could be expected from the flats.

I do not think that any of the witnesses with whom the appellant had discussions at this time has deliberately joined forces with the appellant to misrepresent the facts. They may have been mistaken in their recollection on matters which occurred a long time ago and which were not investigated for several years. Their evidence may be in part a reconstruction influenced by suggestions made to them as to what had happened. On his own admission, Mr. Laurent felt the difficulties of avoiding reconstruction when he was endeavouring to deal with facts of which his recollection had grown dim. But when all this is recognised, I am left with the belief that if the appellant's story of his project to build flats to be retained as an investment in his own name had no truth in it, he would not have been able to put before the Court the evidence which some of these men gave. In particular, the evidence of three of these witnesses appears to me to be of much importance.

The first of these is Mr. Laurent. His evidence has significance as to the actual events relevant to the transaction, as well as in relation to the purpose which the appellant said was in his mind. There is no doubt that it is an essential part of the appellant's case that he looked forward to getting from National Mutual a loan in the order of £300,000, although he may have believed that the amount approved might be somewhat smaller. It may be said in criticism of his case that he had procured no binding agreement to lend him the money or even any definite undertaking to do so. It may be said that it is improbable that without any such agreement or undertaking he would have gone ahead with the venture. But business men do sometimes act, even in substantial matters, in reliance on expectations rather than on firm commitments. What is important, so far as Laurent is concerned, is that he does not deny the appellant's evidence that a large loan had been discussed as early as February 1958. On the other hand he confirms that there was a discussion of a large long-term loan for a building project. His company would not have lent a large sum for the building of home units, as it was interested in long-term and not in short-term loans. His evidence indicates that he probably told the appellant that his request would receive favourable consideration. Laurent proves also that about August 1958 there was a change of policy. The available funds were restricted and it was no longer the Company's policy to make very large loans of this kind. It was Laurent who wrote the letter of 17 October 1958 refusing the application for the loan which had been lodged about 10 October. I have referred before to this correspondence. Laurent's letter refers to ``the present shortage of funds available for investment''. The appellant's letter accompanying the formal application had referred to ``discussions with your Mr. Laurent'' but had not stated when these had occurred. The letter of refusal begins with the words ``With reference to your enquiry earlier this year for a loan of £300,000 on security of a block of flats to be erected at 108-110 Elizabeth Bay Road, Elizabeth Bay''. It is said for the appellant that this is strong confirmation of the evidence that it was that sum which was discussed. But this figure may have been inserted in the letter, not because of any independent recollection which Laurent then had of the earlier discussion, but because it was that amount which was mentioned in the loan application with which he was dealing. This view

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is perhaps consistent with the reference in the letter of 17 October to the actual site in Elizabeth Bay, which was mentioned in the loan application, but was not yet known (according to the appellant) when the discussion took place in February 1958. But leaving aside such matters of detail, the evidence of Laurent is not readily explicable if the appellant's purpose had always been to set up a home unit company to develop the land. Various arguments may be put forward about this evidence. I have mentioned already the point that much of it may be based on reconstruction. It is possible that, having seen the October correspondence, Laurent simply assumed that there had been an earlier approach for a loan for the specific purpose of building flats. Again there are grounds in the evidence for arguing that early in 1958 the appellant was sounding out Laurent for a loan, not for the project with which this case is concerned, but for another project then in contemplation. Further, it may be suggested that the appellant knew that he could not get from National Mutual a loan for the building of home units and thought that if he said he was going to build flats and obtained a loan for that purpose, he would be able afterwards to get the company to agree to the sale of the flats as home units and to the early repayment of the loan. This course was, in fact, taken afterwards in 1960 in relation to the maisonettes in Wolseley Road. But I do not find those explanations convincing and I think that the evidence of Laurent does provide considerable support for the appellant's case.

Mr. Docker gave evidence that he was asked by the appellant to carry out the structural design ``for a proposal at Elizabeth Bay for apartments which he was considering to build for himself''. The work that Docker was to do would have been the same whether the building was to contain flats or home units and the engagement of him to work out the problems of design is in itself a neutral fact. But Docker says that he was aware right from the outset of the job that it was for Eisner personally and for his own use and he says that Eisner ``asked us for special consideration of fees for his own purposes as it was for himself''. I accept that evidence and I regard it as important. I do not doubt that this evidence of Docker was admissible, even if other parts of the evidence as to statements by the appellant of his intentions were not. The engagement of Docker's firm was one of the steps in the actual carrying out of whatever plan it was that the appellant had in mind and the conversations with Docker were directly associated with the implementation of the plan.

The evidence of Mr. Black, who was the appellant's financial and taxation adviser, is also important. On some points I think he was mistaken but I am satisfied that he endeavoured to relate the facts to the best of his recollection. He said that at the relevant time Eisner ``was not as conversant with companies as he is now''. This may be literally true but the impression that it conveys that Eisner was then ignorant of the advantages and the problems of acting through companies is I think erroneous. Mr. Black said also that at a later stage in the transaction the appellant mentioned that he had placed the land in the hands of the estate agent for sale but could not obtain prices that he felt were adequate and that he then went into the idea of forming a company to build units for sale. I do not think that that is a true description of what the appellant did. It may be that Black is mistaken in his recollection or it may be that the appellant did make those statements although they were not true. What does appear, I think, is that Black was trying to give the Court the benefit of his own recollection, although it might be imperfect. He was not repeating a version of the facts suggested to him by the appellant for the purposes of the case. I quote the following passage from Black's evidence -

``Mr. Eisner said to me it was his intention to acquire land and build flats for an investment outside his company business structure. I advised him that in my opinion this would be wrong as he would be building up a probate problem, if he kept it in his own name. He stated he was not concerned with that, that he only wished to have this as a backstop form of investment, irrespective of what happened to his companies. At that stage he was not as conversant with companies as he is now and I think that even at that stage -

His Honour: You had better keep to the discussion that took place and not to your opinions or ideas.

Mr. Mahoney: What he said to you and what you said to him? - He then saw me later and said he had found some land at Elizabeth Bay which he intended to purchase and that he would go ahead with the plan, as he had previously outlined, to build flats for letting. He also, at that state, explained to me how he was going to finance it with his own funds and moneys to be borrowed from the National Mutual Insurance Company.''

For the respondent Mr. Rath submitted in regard to this evidence that if accepted it showed that the appellant went to Black with his mind already made up. His object was not to obtain Black's

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ATC 4028

advice before deciding what to do. It could only have been to procure evidence, for possible later use, of a stated intention. Counsel submitted that when viewed in that way the evidence falls outside the limits in which evidence of statements of intention can be given probative value. But, in my opinion, I am not precluded as a matter of law from making use of the evidence and in point of fact I think it is difficult to reconcile it with a view that the appellant's case is an entirely false one. It is possible that the appellant devised a cunning plan to avoid tax, by contriving that there would be a number of reputable people who could in the future give evidence which would save from the operation of the first part of sec. 26(a) the profit which it was in truth his purpose to make by a resale of the land. But I regard this as unlikely. Eisner is an intelligent and astute man and a good man of business. But I do not think it probable that he set out with an eye on future litigation to deceive his associates and advisers. I do not think that he prepared for himself an ingenious advice on evidence and then acted in accordance with it. It is true that, as it seemed to me, the references which, according to the evidence for the appellant, were made to the personal nature of the project were more frequent than might have been expected and on some occasions appeared pointless. But if the appellant made a point of telling people that it was to be his own investment, I do not think that the explanation of this must be that although it was not true he wanted to have a lot of people available to say that it was. There were reasons why most of the people concerned would have an interest in knowing whether it was to be the appellant's investment or was to become a company project. Laurent would need to know to whom the loan would be made. There were definite reasons for giving this information to Docker and to Black. Kuner had a family interest, as well as a business interest, in Eisner's affairs.

The evidence of the solicitor Mr. Wronker does not deal with the events which occurred at the time with which I am directly concerned and I do not think I need discuss it. The evidence of Mr. Kuner gave enthusiastic support to the appellant's story that a plan of building flats as an investment was formed and was discussed with him as well as with others. He had a tendency to play the advocate. I think this evidence is of less assistance to me than that of some of the other witnesses. But I think that there were discussions between the appellant and Kuner, concerning a plan to build flats as an investment and concerning matters of detail as to the estimated cost and as to the way in which it could be financed.

I must now refer to two documents produced by the appellant and claimed to have been written by him in the year 1958. They are Exhibits B and G. There were circumstances which aroused some suspicion about them. Each was said to have come from the ``personal files'' of Eisner, but each was written on a sheet of paper which had been used for some other purpose not related to his personal affairs. They were not produced and apparently were not remembered, when an investigation was made of this transaction by officers of the Taxation Department. No particular reason appears why they should have been preserved; in the case of Exhibit B it is not easy to see why it was ever written. But in spite of those considerations, there is no real basis in the evidence for a finding that these documents were fabricated long after the relevant time. I believe that they were probably written at or about the times at which the appellant says he wrote them.

Objection was taken to the admission of Exhibit B. I think that if not otherwise admissible, it was admissible in accordance with sec. 14B of the Evidence Act 1898-1966 (N.S.W.). I think that if in fact an officer of National Mutual stated to Eisner in February 1958 that ``a loan could be arranged to 60% of N.M. valuation'' in relation to an ``investment of £500,000'', that was a relevant fact and ``direct oral evidence'' of it was admissible and I think that what is written in Exhibit B tends to establish that fact: see sec. 14B(1). I think that the other requirements of the section were also satisfied. No submission was made to me that sec. 14B could not apply, by reason of the operation of sec. 79 of the Judiciary Act 1903-1969 (Cth) and sec. 21 of the High Court Procedure Act 1903-1966 (Cth). In
Ferguson v. Union Steamship Co. of New Zealand Ltd. (1967-68) 42 A.L.J.R. 33 at p. 34, Windeyer J. referred to these provisions and rejected a tender of letters written by a witness who was not available for cross-examination. The documents (Exhibits B and G) were, of course, said to be the documents of the appellant and he was available to give and did give oral evidence. Section 14B includes an enactment that a statement tending to establish a fact, made by a person who is called as a witness and may give oral evidence of that fact, may nevertheless be admitted as evidence. In my opinion the admission of such a statement does not involve inconsistency with sec. 21 of the High Court Procedure Act.

I think that Exhibit B was admissible but is not of much weight. It does not appear on the face of the document that the discussions with Laurent and Evans related to the project with which this case is concerned or to an investment which would belong personally to Eisner. Other evidence shows that it is not obvious that the discussions must have done so. The connection of what is written in Exhibit B with the transaction to which the

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ATC 4029

appellant says it relates must be found from the oral evidence and not from the document itself. Its terms create some difficulties for the appellant. The figure £500,000 does not fit naturally with his evidence and the explanation of the reference to an ``investment'' of £500,000 (rather than to a project which when completed would have that value) is not entirely satisfactory.

Exhibit G was admitted without objection. I think it was admissible under the general law independently of sec. 14B. It has two distinct parts. The first part is claimed to be a writing out of expected costs and returns of the project for the erection and the letting of a block of flats. It is not easy to understand all the processes involved in the compiling of these estimates. For example, the estimates on the left-hand column were said to have been made by the appellant himself. Then they are classified by him as being good or very good or fair and estimates are made of the saving that might be effected in some of the items. Another point which may be urged against the appellant is that this estimate of building costs does not accord with other estimates put forward by or on behalf of the appellant. In a building application (Exhibit 2), the estimated cost was stated as £190,000. In the loan application (Exhibit K) the value of the buildings was estimated at £490,000. Ultimately the tender for the building contract was for about £384,000, which is fairly close to the estimate in Exhibit G. But there were no competitors for the tendering. The appellant, who could authorise and who signed the tender by Arcos Industries Pty. Ltd., controlled Oceana to whom the tender was made. There is evidence (in Exhibit 5) that a couple of months later, on 13 January 1959, he told the bank manager that the building would cost a little over £200,000. But in spite of the force of these criticisms of the appellant's evidence, they do not destroy the arguments which in my opinion the appellant is entitled to base upon the first part of Exhibit G, provided that it is accepted as a genuine contemporaneous writing. I think that it should be so accepted. It appears to me to be authentic. Its peculiarities tend to dispel rather than to support the notion that it was fabricated as a piece of evidence. It shows that the appellant did contemplate the erection of apartments which would be rented and which would provide a gross income estimated therein at about £50,000 or about 12% of the capital expended and after the meeting of interest payments and other expenses would provide a net income estimated at £19,000. It shows, also, that it was contemplated that the project could be financed to the extent of £300,000 by a loan from National Mutual.

I must now refer to the reverse side of Exhibit G. According to the appellant the figuring which appears there was done after the National Mutual had refused to lend £300,000 but had indicated it would probably lend £150,000. The purpose was to see if the project could still be carried out on a smaller scale. The smaller building would yield gross rents of about £23,000. The building would cost £200,000. The net return would be reduced and so also would be the proportion of the gross returns to the capital outlay, this being a proportion by which according to the appellant the worth of such a project should be evaluated. These calculations according to the appellant caused or at any rate helped to cause him to abandon his project and to turn to a consideration of an alternative way of using the land.

I have set out the principal considerations which appear to support a finding that the appellant's purpose when he bought the land was to cause a block of flats to be erected from which he would derive rents. There are weighty arguments for the view that I should not be satisfied that this was so. But I think that in spite of these arguments I should find in favour of the appellant on this question of fact. Some of the difficulties in the appellant's case have already been mentioned. Without attempting to cover all the details of the arguments against it, I shall examine some of the matters to which counsel referred.

It was said that it is not credible that the appellant embarked on a personal project of this magnitude without prior investigation of what would be involved in it. He could have had only the vaguest idea of the costs. The estimates appearing in Exhibit G were not made until after the land had been bought and the plans had been drawn. Next, it was said that satisfactory evidence was not given to show that the appellant really had available, as ready capital for the project, the sum of £75,000 to which he referred. It was argued, also, that in early 1958 he was discussing with the insurance company several different business ventures. There was at that time a proposal concerning another venture, on land near Hyde Park, which was to be in his own name. Furthermore, he did not have, although he has insisted in evidence that he did have, an arrangement with the bank for an advance of £50,000.

It was said that it was established by the evidence that the appellant referred repeatedly, when discussing his affairs with his bank manager, to his expectation of a loan from National Mutual of £200,000 and not £300,000 and that this destroys his case, which rests on the assertion that it was his inability to obtain £300,000 which forced him to change his plans. It was argued that the whole

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ATC 4030

project went smoothly and with no interruption occurring in October 1958. The inference should be drawn that it was always the same scheme. It was said that, in important respects, the evidence of the appellant was refuted by the powerful and authentic evidence contained in the diaries of the bank manager, Mr. Alexander.

The matters to which I have referred are significant. It is not possible to do full justice to all the arguments addressed to me without writing at enormous length. I shall confine myself to making brief comments on some of the points put forward and dealing at greater length with one or two of them.

It is quite true that the appellant's notions of the costs of the project and of the details of the financing of it were not precise. They were vague. As has been observed, at the best he had no more from National Mutual than an approval in principle of a loan. But I do not think that this would have prevented him from embarking on his plan. In financial matters he seems to have been an optimist, as well as being skillful and successful in obtaining loan money.

I agree that the evidence about the availability of £75,000 from money on loan account, some of which was held in trust for children, has some odd features. These would be more apparent if I set out in detail the evidence relating to that matter, including that which referred to the Term Deposit of £75,000, said to have been made by Gen in the name of an Arcos company. But yet I think that the appellant might well have proceeded upon the assumption (which was verified by the event) that if he bought land, money would be forthcoming from one of the companies which he could use to pay for the land and which could be debited against him by the company.

The points that the appellant's evidence that he had an arrangement to get £50,000 from the bank has been shown to be false and that his expectation from National Mutual was limited to £200,000 depend mainly upon the diary notes of Mr. Alexander. Before dealing with those notes I wish to return to a matter earlier discussed, namely the formal application in October 1958 to National Mutual. The total value of the property as there estimated invites comment. There was evidence from Laurent that National Mutual would ordinarily lend 60% of its valuation of the property and that this might often be equivalent to 50% of the cost of the property. I think it is a possible view that the inflated figure of £600,000 (which the appellant did not explain satisfactorily in evidence) was used in the application because it was really a sham application which the appellant did not expect or wish to be granted. On that view, enquiry by National Mutual would be expected to show up the figure as being greatly inflated and this would prejudice the grant of a loan of £300,000. But it is also a possible view that the high figure was inserted in the hope that, even if it should be discounted considerably, the loan might still be £300,000 or some figure approaching that amount. However that may be, it appears that the reason for refusing the loan was not that it was feared there might be insufficient security for it, but was that the available funds were limited and it was against policy to make such a large loan. It may be that the application was lodged with pre-knowledge that it would be refused; but even if that were so I do not think the inference should be drawn that the appellant had never intended or wished to get the loan. It may be that he was told verbally that he could not get it but yet thought it wise to make a formal application and to obtain a formal refusal, and even to go through the form of asking for a reconsideration of the decision. But that is not inconsistent with his having wished to get the money or with his having felt confident during most of 1958 that he would be able to do so.

Another problem about the proposed loan needs to be mentioned. Its main purpose was to provide for the cost of the building. But according to the usual policy of the lender, the money would not be made available until the building was completed or was nearing completion. This fact may seem to destroy the credibility of the evidence that the project was to be financed by the expected loan from National Mutual. But after consideration I think that it does not do so. The building company would be one of the Arcos group. Payment of any part of the cost of the building which represented profit to that company could be deferred. It would be necessary to provide for current outgoings for the wages of workmen and for whatever materials could not be procured on credit which would allow payment to remain outstanding until the building was completed. But there are grounds in the evidence for concluding that Eisner may have believed that he would be able to persuade National Mutual to make progress payments earlier than was its usual policy and that he would be able to secure an increase for the time being of the money available on overdraft to the Arcos group and, if necessary, to obtain some short-term loan elsewhere as bridging finance.

I come to consider Exhibit 5, which consists of diary notes made by the bank manager Mr. Alexander who has since died. Counsel for the

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ATC 4031

respondent sought to make admissible these entries or some of them by reference to those provisions of the Evidence Act (N.S.W.) which deal with entries ``in a banker's book'' or by reference to sec. 14B. After hearing evidence from the secretary who typed the entries and hearing argument upon a tender of evidence limited to entries which she had identified as having been initialled by Alexander, I ruled that some of the entries were admissible under sec. 14B. Thereupon, counsel for the appellant said that if any were to be admitted he wished that they should all be admitted and counsel for the respondent assented to that course. I have examined the entries, some of which were made as early as 1951 and some as late as 1964. Many are, of course, irrelevant to the present case but some are important. In considering them it must be kept in mind that their author was not available to answer questions about matters in them which appear to be in conflict with the evidence of Eisner. It is possible that explanations might have been given or admissions might have been made of errors which would show that some of the conflicts were only apparent and not real. But it seems clear that there are discrepancies which cannot be attributed to errors made by Alexander or to his misunderstanding of what the appellant said to him or explained by the fact that the entries are not a complete record of all that took place. I think it is clear that the entries show that the evidence that the appellant had been promised £50,000 for the project cannot be accepted. There is no note of such an arrangement and there are notes that in March and April 1958 the appellant was asking the bank for an overdraft limit of £150,000 for a project which he was trying to organise in his own name in respect of property in Elizabeth Street, Sydney, overlooking Hyde Park. In July 1958 it is recorded that the Elizabeth Bay Road project was discussed. The proposal was to erect a block of ``home units''. The appellant had arranged a loan of £200,000 with National Mutual for the project but ``for a minimum period of six months would need our assistance to the extent of £10,000 to which I agreed''. The note that Eisner sought a temporary loan of £10,000 for the project cannot be reasonably explained as an error. I am satisfied that with respect to the proposed loan from the bank for the project the appellant's evidence of what occurred differs radically from what actually occurred. An entry of 14 February 1958 records that at that time the appellant referred to a proposal for the erection of ``luxury home units'' at Elizabeth Bay and enquired what finance he could expect from the bank in connection with his building projects. According to the entry he was given no promise but was told that Alexander would prefer to see the plans more advanced before considering the matter. It is an interesting feature of this entry that it states that the appellant said he was ``on the point of purchasing a block of land in Elizabeth Bay for £12,000 or £12,500''. It indicates to me that probably at this time the MacCarthy land was known to the appellant and he hoped to buy it, although in evidence he has said that it was not until later that he had any specific site in mind. It should be added that in 1959 the appellant was, according to these diary notes, discussing with Alexander the need that might arise for temporary bank accommodation to complete the Oceana building. It should also be mentioned that in January 1959 the bank informed Eisner that repayment of the Term Deposit of £75,000 could be obtained.

The next matter is that Alexander recorded that the appellant told him of a loan from National Mutual for the Elizabeth Bay project of £200,000 I do not think that in these entries that figure was a mistake for £300,000. I think it probable that the appellant did refer to a loan of £200,000.

As has been shown above, references are made from time to time in these notes to ``home units'' and not to flats and counsel for the respondent seeks to attach some importance to that I do not think it necessary to add to the references I have already made to specific items appearing in the diary entries, except to mention one odd item in an entry for 27 May 1960. This states that Eisner referred to the purchase and resale of the subject land and to an amount of £100,000 shown in a ``budget'' submitted by him which ``represents the repayment, the profit on which of course, he states will be tax free being his first land deal'' If he said that, it might appear that he had always been under the impression that the purpose for which he bought the land had no bearing on tax liability and that he was relieved of tax simply because this was his first land deal. But it was not in fact the first time that he had sold land which had been bought in his own name and, in addition, it seems unlikely that he had forgotten completely that in October 1958 he had obtained counsel's opinion on the matter But whatever be the real explanation of that entry, I do not think it has much bearing on the questions which I have to decide.

I do not think that much weight can be attached to Alexander's use of the expression ``home units'' in some of his entries. In other entries he referred to ``flats''. The entries are not verbatim records of what was said. We are without the benefit of any account that Alexander might have been able to give, if he had been alive and had been called as a witness, of his understanding and use in 1958 of those expressions.

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ATC 4032

I believe that Eisner probably spoke to Alexander of a proposed loan from National Mutual of £200,000. But I do not conclude that Eisner never had any hope of getting more than that amount. When he had his earlier discussion with Laurent the amount involved in the project would necessarily have been discussed in general terms and without regard to any precise estimate of cost. Whether or not the sum of £500,000 was mentioned (see Exhibit B), it is probable that Eisner believed that about 60% of the National Mutual valuation might be obtained. When at a later time he made the calculations shown on Exhibit G the assumption there made that £300,000 would come from National Mutual cannot be fully justified on any logical or mathematical grounds. But I think it may well be the fact that Eisner hoped that he could get that amount or not much less than it. The correspondence in October 1958 is not readily reconcilable with the view that Eisner had never sought more than £200,000 from the bank. I think it likely that when Eisner spoke more than once to Alexander of a loan of £200,000, he did this not because that was the amount that had been discussed but because he thought it better in his dealings with Alexander to minimise the extent to which he hoped to borrow money elsewhere.

In my opinion no satisfactory explanation was offered on behalf of the appellant for the conflict between his evidence and the entries which show that he had not been promised and had not even tried to get £50,000 from the bank for this project. I have indicated earlier that if his case rested simply on his own testimony he would fail to satisfy me that it should be accepted. One of the important reasons would be that I could not accept that part of his evidence which refers to the loan of £50,000. But his case in its essential ingredients is strongly supported, in my opinion, by other evidence to which I have referred. I think that that other evidence outweighs that which tells against his case. The evidence relating to the bank loan is a significant part of the material which casts doubt on that case. But I do not think it requires the conclusion that the project described by the appellant never existed or the conclusion that it could not have been the failure to obtain the desired loan from National Mutual which caused it to be dropped because it could no longer be financed. It is entirely true that in the appellant's versions of what happened the prospect of getting £50,000 from the bank appears as an important element in the plan. It might be argued that by his own case the appellant has made it clear that without that prospect the plan could never have been seriously entertained. These and other circumstances have caused me to hesitate before accepting the claim that a plan of this kind was in the appellant's mind when he bought the land. But I think that it would be wrong to conclude that it would have appeared at the time to the appellant (although it may now so appear to us) that, even if the £300,000 could be obtained from National Mutual, there would be such a deficit in the finance available that the plan would be hopeless. If it be supposed that there was no promise or expectation of £50,000 from the bank, it may yet have been true that Eisner believed that by some means his purpose could still be achieved whether by persuading the bank (after the National Mutual loan was secured) to advance money or by a cutting down of the amount which his constructing company would be paid or otherwise. There are formidable difficulties in the appellant's case. Yet I think it cannot be rejected except by discarding evidence given by others, which I regard as truthful and in its essential features reliable.

I find that in May and June 1958 when the lands were bought the appellant had the purpose of erecting a building on the land and of letting flats in the building to tenants. I am not disposed to accept his evidence that he did not consider at all any alternative that might be adopted and in particular that he gave no thought to the alternative of developing the land for home units, if for some reason he could not proceed with his original project. But if it ought to be inferred that he did have it in mind that in that event he would resell the land and believed that he would be able to do so at a profit, in my opinion that would not render him liable to be taxed under the first limb of sec. 26(a).

Although the appellant's project had not been properly investigated and there was no certainty that it could be carried out, I do not regard this as a case in which he bought simply because of a belief that in one way or another it would prove profitable and intended to decide later whether it would be better to retain it or to realise it. On my view of the evidence the dominant purpose was to retain it, even if the appellant had it in mind that if later the land were to be sold it could be sold at a profit: see
Buckland v. F.C. of T. (1960) 34 A.L.J.R. 60 at p. 62.

My conclusion is that the land was not acquired by the appellant for the purpose of profit-making by sale. The respondent contends that even if that be so the appellant derived a profit which was income within the meaning of sec. 25 without resort to sec. 26(a), or alternatively a profit which was taxable under the second limb of sec. 26(a). As to sec. 25, it was submitted that the appellant bought the land as part of his business and it was intended to be used as part of his

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ATC 4033

business and in some way turned to profit. On that argument it does not matter whether the appellant had decided upon any particular way in which the land would be developed. It was a business venture of a man whose companies were in the building business and who was likely to be able to use in the course of his business a first-class residential building site. Counsel acknowledged that this way of putting the case did not differ much from one of the submissions which he made as to the application of the second limb of sec. 26(a). That submission was that at the time when the land was bought there was a profit-making undertaking or scheme. There was a plan to buy it and afterwards to use it to make a profit in some way, whether this would be by resale in the general market or by resale to a company to be formed which would itself derive profit from the venture or by providing a profitable contract for an Arcos building company. But I am of opinion that these submissions should not be accepted. The decision in favour of the appellant upon the main issue of fact litigated in the appeal means that his dominant purpose was not the making of profit by resale of the land, either to the highest bidder in the open market or to a company intended to be formed to buy it. The finding means also that in spite of the difficulties in his way, his claim that his purpose was to retain the land and make it into an asset which would produce income from rents has been accepted. Clearly he could not become liable under sec. 26(a) or otherwise for the profit which was in fact made in this case, merely because it was part of his purpose that he would obtain a substantial income from the rents. If his purpose had been carried out he would have been liable to tax on the net income derived from the property. But the property itself would have been a capital asset in his hands and if at some time he decided to sell it and received more than he had paid for it, that would have been a capital gain. That would be so, even if when he bought the land he expected that if it should subsequently be sold he would get an enhanced price. It would also be so in my opinion, even if he had a collateral purpose of providing building work for one of the Arcos group from which it would make a profit. His main purpose required that a building should be erected. It is certain that he would have intended that this would be done by one of his own companies which might make a profit from it, although no doubt he would expect that as he would be paying for the building the profit would be kept to a minimum. But the intention to have the building erected by an Arcos company could not turn his plan into a profit-making undertaking or scheme within the meaning of sec. 26(a). It seems to me that in the circumstances of this case a finding in favour of the appellant on the first limb of sec. 26(a) and a finding that from the outset there was a profit-making undertaking or scheme which brought into operation the second limb of sec. 26(a) would be inconsistent findings. Similar considerations require in my opinion a conclusion that the excess of the sale price over the purchase price cannot be held to have been ``income'' in the ordinary meaning of the term, so as to be included in the appellant's assessable income under sec. 25.

I must now examine a further submission for the respondent. This was that if it be assumed that in October 1958 the decision of National Mutual forced the appellant to abandon his project and to take a different course, the events which then occurred constituted the carrying on or carrying out of a profit-making undertaking or scheme, from which in fact a profit was derived and that profit was taxable. This profit was not the difference between the purchase price and the sale price. It was the difference between the price which the appellant obtained for the land and its real value at that time. The scheme was one which made available to Oceana and to the building company opportunities for profit-making on their part. But so far as the appellant's personal affairs were concerned, the essence of the scheme was that by creating a purchaser for the land which would buy it at a price controlled by the appellant himself, he would make a profit by getting more for his land than it was worth.

The events which occurred in October 1958 and afterwards are not really in dispute. There was some evidence to suggest that the appellant tried in the first place to sell the land for whatever price could be obtained in the market. But this is unconvincing and I do not think that any real effort was made to do that. The appellant sought valuations of the land but according to his evidence this was for the purposes of the home unit project. That project appeared in full grown vigour immediately after National Mutual gave its decision. The project went through no periods of gestation or infancy. As has been shown, counsel's advice was sought about it even before a formal decision in writing was given by National Mutual. There is no doubt that Oceana was created by the appellant to buy the land and to build the home units on it. For the appellant it was said that there could have been no ``scheme'' designed to enable him to sell above the ordinary value, because the sale price did not exceed what the appellant was told was the market value or what that value was in fact. But on the evidence called as to value, I find that the price did exceed the value and in spite of the valuations that Eisner obtained I think that he thought it likely that the price was better than he

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ATC 4034

could readily obtain elsewhere. According to the witness Black, the appellant said he proposed to sell to a home unit company to be formed by him because he could get a much better price than if he sold in the open market. Of course he had the additional inducement that his companies would be concerned with the development of the land.

I think that the question whether or not the second limb of sec. 26(a) operated on this transaction is not an easy one to answer. But I have decided that it did not. I have considered many of the authorities dealing with this question but I do not intend to discuss any except the most recent of them. I think that support could be found in some of the cases for the respondent's argument on this question. But having considered the majority judgment in
McClelland v. F.C. of T. 70 ATC 4115; (published after this case was argued), I am of opinion that I should hold that in so far as the appellant derived a gain from what he did in and after October 1958 it was a gain obtained from the realisation of a capital asset, which was realised ``in an enterprising way so as to secure the best price'' (70 ATC at p. 4119). No doubt it is a great advantage to a man wishing to sell his land to be able to create his own purchaser and in some circumstances a man who obtained in that way an excessive price for his land could be made to account for it: cf.
Tracy v. Mandalay Pty. Ltd. (1952-53) 88 C.L.R. 215. But no question arose in the present case as to any malpractice on the part of the appellant. I do not think that the unusual method by which the asset was realised prevents a finding that the ``scheme'' was a scheme to produce a capital gain and not a scheme to produce assessable income. I do not think that the acquisition and the sale of the land had ``the character of a business deal'' or constituted ``an adventure in the nature of trade'' (see 70 ATC at p. 4120).

If the last-mentioned submissions of the respondent had been accepted, it would have been necessary to find what was the value of the land in October or November 1958 and accordingly evidence was called on that question. On my view of the case such a finding becomes unnecessary, but I shall state my conclusions as to the evidence on this question, as they may be useful if there should be an appeal in which a different view prevails. I did not find acceptable the opinion on this point of Mr. Dudley or the methods by which he arrived at it. I preferred the reasoning and opinions of Mr. McCarthy to those of Mr. Martin. It is not in doubt that the site had a greater value than the sum of the values of the separate blocks which the appellant bought. It might be expected therefore that the land must have had a value considerably higher than £47,200. But Mr. McCarthy thought that the appellant had paid more than a fair price for the Hixson land. His valuation for the consolidated site as at 14 November 1958 was £48,000. This was based upon a value of £1. 5. 0 per square foot on 24 June 1958, increasing to £1.8.0 by 14 November. Mr. McCarthy impressed me as a witness of skill and experience who had given much thought and care to his task. But having considered all the evidence I think his assessment was somewhat too low. In my opinion a fair valuation of the consolidated site would be £1.10.0 per square foot on 24 June 1958. That means that McCarthy's figure of £48,000 should be increased by 20%, resulting in a figure of £57,600. If I had held that the amount by which the sale price exceeded the value of the land should have been brought to tax, I should have invited the parties to seek an agreement as to the amount of any expenses which should be deducted in order to arrive at the net sale price, from which the value of the land should be subtracted.

In my opinion the appeal should be allowed. The amended assessment of 5 January 1966 should be set aside. The respondent should pay the appellant's costs of the appeal.

ORDER:

Appeal allowed. Amended assessment of 5 January 1966 set aside. Respondent to pay the costs of the appellant of the appeal. Usual order in relation to the exhibits.