Master Butchers Limited v. Federal Commissioner of Taxation.

Judges:
Mahoney J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 28 February 1974.

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Mahoney J.: This matter concerns an assessment made by the Commissioner of Taxation against Master Butchers Limited in respect of income said to have been derived by it during the period ended 1 December 1971. An assessment was issued in respect of a total amount of $230,494. The amount here in question, that is the amount the subject of the present interlocutory application, is an amount of $224,357, said to have been included in the assessable income of the taxpayer.

When the assessment in question was issued, that amount was referred to in an adjustment sheet accompanying that assessment in the following terms-

``Profits arising from the operation of the taxpayer's by-products factory. This accords with the certificate of the Advisory Committee given on 22 February 1972.''

The taxpayer lodged a notice of objection in relation to, inter alia, that particular amount and, in the grounds relied upon by the taxpayer, four matters were specified as being the grounds upon which the taxpayer objected to the inclusion of that amount in its assessable income. These grounds are in the following terms-

``1.(a) The said sum of $224,357 is not nor is any part thereof assessable or taxable income of the Taxpayer Company.

(b) The whole of the said sum of $224,357 was income derived by the Partnership of M.B.L. By-products and assessable in the hands of the four members of the said Partnership, namely, Ron Wallace Investments Pty. Ltd. (Receiver appointed), Group Three Pty. Ltd.

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(Receiver appointed), Hollywood Drive-in Theatres Pty. Ltd. (Receiver appointed) and Oliver & Associates Pty. Ltd. (Receiver appointed) and after providing for all allowable deductions the balance (if any) was taxable income (or carried forward losses) in the hands of the said partners.

(c) There is not and has not been in relation to the said sum of $224,357 or any part thereof or any transaction involving the said sum of $224,357 or any part thereof any contract, agreement or arrangement made or entered into, orally or in writing which has or purports to have the purpose or effect of in any way, directly or indirectly-

• (i) altering the incidence of any income tax; or
• (ii) relieving any person from liability to pay any income tax; or
• (iii) defeating, evading or avoiding any duty or liability imposed on any person by the said Act; or
• (iv) preventing the operation of the said Act in any respect.

(d) The transaction between the Taxpayer Company and the Partnership `M.B.L. By-products' whereby the latter purchased from the former its by-products division as a going concern including taking over employees, acquiring the existing stocks of Tallow, Meatmeal and Raw Materials and Sundry Stores for a total sum of $31,177 and M.B.L. By-products proceeded to carry on such business and to use the said Stocks was a proper and ordinary business and commercial transaction between the Taxpayer Company and M.B.L. By-products.

2. The Sum of $102,447 should have been allowed as a deduction from the assessable income of the 1971 year as being a loss carried forward pursuant to sec. 80 of the abovenamed Act-

OR, in the alternative (in the event of it being found that a loss of some other amount is to be carried forward from the previous years or either of them) by the allowance of the amount of such loss as may ultimately be found to be properly carried forward from the years of income ended 1 December 1969 and 1 December 1970 pursuant to Section 80 of the abovenamed Act AND in any event the amount of any such loss carried forward pursuant to Section 80 should be added to the amount of the loss for the 1971 year of $60,243 as per the Taxpayer Company's return.

The subject of the amount of losses to be carried forward from the 1969 year and the 1970 year is subject to Objections by the Taxpayer Company which have been referred to a Board of Review and such references have been heard but the decisions thereon have not yet been announced. The Taxpayer Company therefore reserves the right to have carried forward losses properly adjusted after the final determination of the said Objections lodged in respect of the 1969 year and the 1970 year.

3. The said sum of $64,162 bonuses paid by the Taxpayer Company being a co-operative company as defined by sec. 117 and 118 of the said Act constitutes bonuses distributed among the shareholders of the Taxpayer Company based on business done by such shareholders with the Taxpayer Company and should be allowed as a deduction from the assessable income of the Taxpayer Company for the 1971 year.

In the alternative the sum of $23,010 for bonuses actually paid out of profits for the 1971 year should be allowed as a deduction leaving the balance of $41,152 to be claimed as a deduction in the 1972 year.

4. (a) The said sum of $2,218 constitutes an outgoing incurred by the Taxpayer Company during the 1971 year in gaining or producing its assessable income and was necessarily incurred in carrying on the Taxpayer Company's business for the purpose of gaining or producing such income and no part of such sum constitutes a loss or outgoing of capital or of a capital private or domestic nature nor was any part of such sum incurred in

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relation to the gaining or production of exempt income and should be allowed as a deduction from the assessable income of the Taxpayer Company for the 1971 year.

(b) The Taxpayer Company sold its by-products business to `M.B.L. By-products' as a going concern and part of the arrangement was that M.B.L. By-products was to take over all of the Taxpayer Company's employees engaged in the said by-products business without formal termination of their employment and in consideration thereof the Taxpayer Company paid or credited to M.B.L. By-products the sum of $2,218 which would have been actually payable to the relevant employees if their respective employment agreements had been terminated by the Taxpayer Company at the time of handing over to M.B.L. By-products.

5.(a) The said sum of $36,308.85 debited by the Deputy Commissioner and constituting an assessment of additional tax for incorrect return should not have been assessed and there are no grounds for imposing such a liability on the Taxpayer Company and the said additional tax should be remitted.

(b) The Taxpayer Company did not fail to duly furnish as and when required by the said Act or the regulations any information in relation to any matter affecting either its liability to tax or the amount of tax; nor did it omit from its return any assessable income nor include in its return as a deduction for expenditure incurred by it any amount in excess of the expenditure actually incurred by it; nor did the Taxpayer Company make or deliver a return which was false in any particular.

(c) No person has in a declaration made under, or authorized or prescribed by the said Act or the regulations knowingly or wilfully declared to any matter or thing which was false or untrue; nor has the public officer of the Taxpayer Company in its return for the 1971 year knowingly or wilfully understated the amount of any income nor made any misstatement affecting the liability of the Taxpayer Company to tax or the amount of tax; nor has the public officer by any wilful act default or neglect, nor by any fraud act or contrivance whatever, avoided or attempted to avoid assessment or taxation.

6. Accordingly the Taxpayer Company claims that the tax assessed in the above described Notice of Assessment is wrongly calculated and is excessive.''

The taxpayer requested that the objection be treated as an appeal to this Court and the matter was transmitted to this Court on or about 18 October 1973. As has been the practice of this Court when the matter came before the Court, orders were made that the evidence to be relied upon by the taxpayer in the appeal be placed upon affidavit and that the affidavit or affidavits be filed and served upon the Commissioner of Taxation within a specified time and, correspondingly, that the evidence to be relied upon by the Commissioner of Taxation be placed on affidavit and that the affidavit or affidavits be filed and served on the taxpayer within a specified time.

I am informed that in fact the taxpayer has prepared an affidavit setting forth material and that the Commissioner of Taxation correspondingly has prepared an affidavit setting forth a deal of material including correspondence.

Application has now been made to me for an order that the Commissioner furnish to the taxpayer further and better particulars. The further and better particulars requested are set forth in the letter of 19 December 1973, written by the solicitors for the taxpayer to the Commonwealth Crown Solicitor (Ex. A in the present application). This letter is in the following terms-

``re: Master Butchers Limited

We refer to the proceedings herein. We are of the view that we should seek particulars of the Commissioner's contentions so far as certain aspects of the Appeal are concerned.

Would you, therefore, please inform us of the grounds on which you contend that the sum $224,357 should be registered

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as income. In particular, if section 260 is relied on, please inform us of: -

• (A)
  • (i) the contract,
  • (ii) the agreement,
  • (iii) the arrangement,

  relied on.

• (B) Whether you rely on sub-paragraph (a) or (b) or (c) or (d) of section 260?
• (C) Why it is said that the particular sub-paragraph referred to in (B) operates in this case.
• (D) How it is said that section 260 operates in this case to create a liability to tax?

Yours faithfully,

Bartier, Perry & Purcell''

The Commissioner's reply through the Deputy Crown Solicitor was a letter dated 11 January 1974, (Ex. B in the application before me). That letter is in the following terms-

``Dear Sirs,

Master Butchers Limited v. Commissioner of Taxation:

Income Tax Appeal to Supreme Court: Your reference WRF:LD

I refer to your letter dated 19 December 1973.

2. I am instructed to advise you that the Commissioner of Taxation is not prepared to limit the scope of the arguments which may be put to the Court on his behalf on the hearing of this appeal by providing any answer to the questions raised in that letter. I am instructed to remind you that under section 190(b) of the Income Tax Assessment Act 1936 as amended, the burden of proving that the assessment is excessive rests upon your client. I am instructed that the Commissioner of Taxation is of the view that he must reserve his right, after hearing the evidence advanced to establish the case for your client, to rely upon such arguments based on the provisions of section 260 of the Act as may seem appropriate in the light of that evidence.

3. I am instructed that it is the view of the Commissioner that, if facts exist whereby section 260 of the Act is brought into operation, the section applies by direct force of law and that its operation is not in any way dependent upon the section's being invoked or relied upon by the Commissioner. The Commissioner therefore instructs me to advise you that the reasoning upon which the Commissioner proceeded at the time of making the subject assessment is not material to the issues which have to be decided by the Court (
vide Wade's case (1951) 84 C.L.R. 101 at 116-7).

4. If it appears upon perusal of the affidavits filed on behalf of your client that there are matters of fact which are not in dispute, I shall advise you before the hearing of any facts which the Commissioner is prepared to admit.

Yours truly,

Deputy Crown Solicitor''

The question is now to be decided whether any order should be made for further and better particulars and, if so, what order.

In my opinion, this Court in the present case is governed by the High Court Rules as they were in force at the relevant date specified in the Income Tax Assessment Act No. 3 of 1973. The High Court Rules as in force at the relevant date so far as they are applicable govern the procedure before the Court at least in the present case.

The question I have to determine is whether, having regard to the Act and those Rules, there is jurisdiction to make an order of the kind sought. In my view, in an appropriate case there is power in this Court as there would, in my respectful view, have been in the High Court of Australia to make the appropriate order for further and better particulars.

By Order 20 of the High Court Rules r. 6 it is provided -

``A further and better statement of the nature of a claim or defence, or further and better particulars of a matter stated in

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a pleading, notice or written proceeding requiring particulars, may be ordered upon such terms as to costs, and otherwise, as is just.''

It was contended on behalf of the taxpayer that under that provision this Court has jurisdiction to make the necessary order for further and better particulars. I am by no means convinced that the power given by that precise provision would be applicable in the present case.

The present matter comes before this Court in substance governed by the provisions of Order 65 of the High Court Rules and, in particular, r. 11 and the following rules of that particular order. As applied to this Court, the procedure which appears to be envisaged is that the proceeding before this Court will be initiated by the filing of a notice of appeal in this Court. When that notice of appeal is filed, there does not appear to be necessarily envisaged the filing of any further operative document by either of the parties and, in particular, there do not appear to be necessarily envisaged any further pleadings. It may be that the Court would be entitled to order pleadings in an appropriate case; in this case it is not necessary for me to express any concluded view upon that aspect. It may be also that the Court could require some other statement of the parties' case. However, unless and until the Court does so, assuming it has power so to do, then the only document before the Court is the notice of appeal referred to in r. 14 Order 65 as it is applied to this Court.

I doubt whether the matters specified in r. 6 of Order 20 comprehend such a case. However, in my opinion the Court has, in addition to any specific power given by Order 20, an inherent power to order further and better particulars where the requirements of justice so dictate.

The circumstances in which further and better particulars may be ordered and the principles upon which they should be ordered have been considered in many cases dealing with Acts and matters other than the Income Tax Assessment Act, 1936 (as amended): see
McSpedden v. Harnett (1942) S.R. (N.S.W.) 116;
Dougherty v. Nationwide News Pty. Limited (1967) 86 W.N.N.S.W. 181 at pp. 184-5; and cases there referred to. In
The King v. The Associated Northern Collieries (1910) 11 C.L.R. 738 at p. 740, Isaacs J. said -

``I take the fundamental principle to be that the opposite party shall always be fairly appraised of the nature of the case he is called upon to meet, shall be placed in possession of its broad outlines and the constitutive facts which are said to raise his legal liability. He is to receive sufficient information to ensure a fair trial and to guard against what the law terms `surprise', but he is not entitled to be told the mode by which the case is to be proved against him.''

In an appropriate case, the Court can, in my opinion, make an order for further and better particulars against a party who does not bear the onus of proof of a particular issue or of a matter generally, for example, where that party is seen to be setting up a positive affirmation or an affirmative case: The King v. The Associated Northern Collieries (supra) at p. 741;
George v. F.C. of T. (1952) 86 C.L.R. 183 at p. 190, per Kitto J.; McSpedden v. Harnett (supra) at p. 117; Howard v. Bonneman (1972) 1 W.L.R. 863 at pp. 867-9.

These principles are, in my opinion, applicable in proceedings under the present Act. I accept that, in an appropriate case, the Court has power to make an order for further and better particulars to be furnished by the Commissioner of a matter in issue in the proceeding.

In George v. F.C. of T. (supra) at p. 190, Kitto J. was of the opinion that, if it appeared that the Commissioner intended to set up a positive case (in that case, as to the source of certain income), the Court could and would order particulars. On appeal, the majority of the Court, in affirming his Honour's decision, did not dissent from this opinion of his Honour. Fullagar J. (at pp. 207-8) doubted whether the Court had power to make an order that the Commissioner answer what he held to be interrogatories, but did not deal with the power to order particulars. His Honour expressed the view that the Commissioner ``is only nominally a

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`party' to the proceedings'', and said (at p. 208), that this ``does not mean that he is not, in many respects, subject to orders of the Court, but it does mean that certain orders which are quite appropriate as between parties to an action are quite inappropriate as between an appellant taxpayer and the Commissioner''. The fact that the Commissioner ``represents the Crown in right of the Commonwealth'' does not, of itself, mean that interlocutory orders such as for discovery or interrogatories, cannot be made: compare
Naismith v. McGovern (1953) 90 C.L.R. 336 at p. 342. It may be that, if the power of the Court to make orders against the Commissioner is ultimately held to be limited, it will be held to be limited in relation to the making of orders requiring the detailing or disclosing of the circumstances of the exercise of the powers vested in the Commissioner by the Act rather than in relation to orders directed to making clear in the course of a proceeding the nature of the case to be made out by the Commissioner; although I note that, even in a case of the former class, it has been said that the Commissioner should, in exercising his discretion in relation to sec. 99 and 99A, ``inform the taxpayer of the facts he has taken into account in reaching his conclusion'':
Giris Pty. Ltd. v. F.C. of T. 69 ATC 4015 at p. 4018; 119 C.L.R. 365 per Barwick C.J.; see also at p. 4024, per Windeyer, J.

If the Court has the power to order further and better particulars to be supplied, it does not, of course, follow that the power will be exercised in every case.

Without seeking to limit the circumstances in which an order for further and better particulars may be made, such an order may, in my opinion, be made where it appears to the Court upon the material before it that there is a real and a substantial danger that the party seeking the particulars will be prejudiced by not knowing the nature of the case to be made out against him. In a proper case, such a party may in my opinion be entitled to an order that, e.g., the other party furnish particulars of the general nature of and of the constituent facts of the case to be relied upon or to some other order appropriate in the circumstances.

I put the matter in these general terms because it is undesirable that an attempt be made to circumscribe the power of the Court or its discretion in this particular field. The order if any to be made will be such an order as accords with the requirements of justice in the particular case: compare
Palamisto S.A. v. Ocean Insurance Ltd. (1972) 2 Q.B. 625 at p. 639D. Bearing this in mind, the question then arises as to whether any particular order should be made of the kind here in question.

The particulars sought by the taxpayer in the letter of 19 December 1973, (Ex. A) fall into two broad categories. First, the Commissioner is asked to ``inform us of the grounds on which you contend that the sum of $224,357 should be registered as income''. (It has been accepted in argument before me that the word ``registered'' should be read as ``regarded''). In my opinion, having regard to what has been said at the bar table, it does not appear to be in issue that there was received a sum of the quantum referred to and that it was of the nature of income. The issue appears to be whether that income was derived by the taxpayer or by some other person or persons. In substance, I am not convinced, on what has been put before me, that the taxpayer is in any doubt that the amount in question is income or as to the basis upon which it is income.

The second category of particulars requested is that in relation to sec. 260. The taxpayer has asked the Commissioner to specify and now seeks an order that he specify what is the contract, the agreement or the arrangement (terms taken from sec. 260) to be relied upon by the Commissioner as the basis for contending that the income is income of the taxpayer. The Commissioner has indicated to the taxpayer and the taxpayer clearly understands that the Commissioner intends to rely in support of the assessments upon the provisions of sec. 260, and in addition, upon a claim that transactions which would have the effect of making the income not income of the taxpayer but of someone else were sham transactions, that is, as I understand the present use of the term, transactions which were null and void in general and not merely against the Commissioner of Taxation.

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I am conscious of what has been said as to the desirability that there be made clear in any proceeding involving sec. 260 what is the contract, agreement or arrangement by virtue of which that section is said to operate. Reference may be made, for example, to what was said by McTiernan J. in the
Hooker-Rex case 70 ATC 4033 at p. 4039; 123 C.L.R. 71 at p. 81. If in fact I were convinced that the taxpayer was in a real danger of being taken by surprise in relation to the general nature or the constitutive facts of the contract, agreement or arrangement to be relied upon, then I would be required to give more careful consideration to the question whether an order should be made for the specification of matters to be relied upon by the Commissioner. However, as a result of the orders which I have previously made as to the filing of affidavits, the parties have before them, as the case stands, all of the factual matters which are to be relied upon for purposes of conduct of the case, subject to one matter to which I shall refer.

As a result of the orders which have been made, affidavits have, as I have said, been filed, and these affidavits, according to the terms of my orders, may be taken as setting forth the factual material to be adduced respectively by each party. Unless and until an order be made allowing the using of further factual material, and subject to material adduced in cross-examination this material constitutes the whole of the factual material upon which the present matter is to be determined.

The procedure before this Court is one which to date has worked efficiently and the efficient working of it will no doubt require that there be some flexibility in its administration but if factual material is placed before this Court, consequent upon such orders as I have referred to, then the Court will require to have established before it significant reasons before additional material will be allowed to be adduced at the hearing.

At this point, therefore, the taxpayer has, subject to the matters to which I have referred, all of the factual material before it upon which the Commissioner may rely in alleging that there is either the inference of sham to be drawn or, alternatively, the conclusion to be formed that there was the relevant contract, agreement or arrangement under sec. 260. The taxpayer has, in substance, not merely a general outline of the facts to be relied upon but the particular facts themselves. If these facts be, as I have described them, all of the particular facts, then what the taxpayer is asking the Commissioner to do by this portion of its letter of 19 December 1973, is to state the legal categorisation to be applied to these particular facts or to state the manner in which the particular facts are to be argued to be a contract, agreement or arrangement. It may be that there will be some factual inferences or conclusions involving the steps of the argument from the facts to the conclusions for which the Commissioner contends but substantially, in the present case, these steps will involve the categorisation of the stated facts.

I do not think that a taxpayer is entitled to require the Commissioner to provide him with ``particulars'' of this kind.

However, the taxpayer points to one matter which requires further consideration and subject to which I have made the previous observations. The taxpayer has pointed out, and correctly, that the Commissioner is, as the taxpayer is, entitled to cross-examine the deponents upon their evidence and the taxpayer submits that it may be that in the course of that cross-examination further evidence will emerge and that that evidence may catch the taxpayer by surprise. He therefore asks that, in the light of this, further and better particulars be supplied. As I understand the rationale of this particular submission, it amounts to this, that the taxpayer says, ``unless I can in advance tie down the Commissioner to the establishment of the particular contract, agreement or arrangement or otherwise in relation to the matters of particulars sought in this part of the letter, it may be the Commissioner will bring out additional facts in cross-examination and it may be that then I will be taken by surprise in relation to the matters''. The taxpayer appears to be contending that in order to prevent this surprise he is entitled to prevent the Commissioner, having given particulars, going outside those particulars in the

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evidence which he produces in cross-examination.

It is possible that in cross-examination further facts may come forth which will ``surprise'' the taxpayer but this is an incident not merely of income tax appeals but also of cases generally which proceed not by way of pleadings but by way of summons and affidavit evidence. The great majority of the proceedings before this Court in its ordinary jurisdiction are proceedings upon summonses under P. 5 r. 4A of the Supreme Court Rules and the possibility of this form of surprise during cross-examination is an incident of those proceedings.

However, difficulty in practice seldom arises and, in any case in which it does, it can adequately be dealt with by way of adjournment, or otherwise such order can be made as will ensure that no substantial prejudice results to a person in the position of the taxpayer.

I do not think that in the present case the facts establish any likelihood that such a surprise will arise. Nothing has been pointed to to establish such a likelihood and, having regard to such of the facts as are before me, I do not think that this is a case in which I should make an order for the kind of particulars sought.

There is the additional factor which I take into account. The Commissioner has pressed upon the Court that he is frequently in the position that at the commencement of the hearing he does not know all of the facts and that the function of cross-examination in a particular proceeding is not merely to test the accuracy or credibility of the particular witness but also to give the Commissioner an opportunity to investigate material of which he may not have been aware or of which he may not have been fully aware. There is substance in this submission, although it may be that the Commissioner's power under the Income Tax Assessment Act to seek information, if exercised prior to the commencement of the proceedings, would to some extent cut down the need for investigation before the Court. However this be, I accept that it is legitimate, in the course of a proceeding of this kind, for the Commissioner to attempt to investigate by cross-examination appropriate aspects of the taxpayer's case. If the effect of an order for the furnishing of further and better particulars, of the kind here sought, would be to restrict the legitimate exercise of that power of investigation by cross-examination, the Court would be slow to make such an order. This, as I have said, is a factor which the Court must take into account and which I take into account in the present case.

In all of the circumstances, I do not think that this is a proper case for the ordering of further and better particulars and I refuse to make such an order. I should note, however, that if during the course of the proceeding circumstances arise in which the taxpayer is significantly prejudiced and it appears appropriate that some interlocutory order should be made to deal with that prejudice, then the taxpayer may make an application for such an order and the fact that further and better particulars have been refused at this stage will not prejudice it in such an application.

I reserve the question of costs of this application to the hearing.