Federal Commissioner of Taxation v. Sahhar.

Judges:
Fullagar J

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 20 March 1984.

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Fullagar J.

This is an appeal by the Commissioner of Taxation from a decision of a Board of Review pursuant to sec. 196(1) of the Income Tax Assessment Act 1936 (Cth.)

In his income tax return for the year ended 30 June 1978 the taxpayer returned his income derived as a medical practitioner which was considerably in excess of the deduction next referred to. From this he claimed a deduction of $50,001 under heading 13 in the printed form which contains inter alia the following printed words - ``Partnerships Trusts Etc. - Share in partnership income or income as a beneficiary under will, settlement, deed of gift or instrument of trust''. Under the printed subheading, ``Full name of partnership, trust etc. and, if known, file number'', there appear only the typed words ``Siward Traders Partnership''. In the column headed ``Income'' there are typed the bracketed figures (50001), and these bracketed figures are typed again as a total opposite the printed words ``Net Income Loss'' of which the central word Income has been struck out with the typewriter. These are the only relevant contents of the return.

By an assessment dated 7 March 1979 the Commissioner assessed the taxpayer's income tax at an amount which included $15,571 as ``additional tax for incorrect return''. The attached Adjustment Sheet adjusted from $50,001 to $4 what is described as ``The claim for the share of loss from the partnership of Siward Traders'', and thus added $49,997 to the taxable income as returned. The taxpayer objected to the assessment and, after the Commissioner had disallowed the objection, the taxpayer procured the reference of the objections to the Board of Review.

The taxpayer adduced evidence before the Board which the Board declined to act upon, but the Board allowed the appeal on the ground that sec. 226(2) of the Act, upon which alone the Commissioner relied to support the assessment for additional or penalty tax, had no application to the inclusion of an amount in a taxpayer's return as a deduction for the taxpayer's share or interest in a partnership loss.

No evidence at all was adduced before the Supreme Court, except that the Commissioner tendered a portion of the Commissioner's file which portion included the documents above referred to. It included also an income tax return purporting to be on behalf of a partnership named Siward Traders. The ``declaration by partner'' verifying this return on page 1 of the printed form was not signed by a partner but bore the signature L. Swanson below typed words as follows - ``(Sgd.) Soretti Pty. Ltd. as Manager of Partnership''. All the attached sheets were signed by L. Swanson. This partnership return is not made ``by the partners resident in Australia or by any one of them'' as required by Reg. 13(1) of the Regulations (Exhibit C before this Court) and by the requirements of the Commissioner published in Commonwealth Gazette No. G.25 of 27 June 1978 (Exhibit B before this Court). It is clear that the taxpayer was a partner and that he was resident in Australia. The partners therefore have failed to put in a partnership return as

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required, but a return in respect of the partnership is in evidence.

Counsel had nothing to say on the questions what (if any) effect this had upon the partnership return considered as a piece of evidence or upon the inferences (if any) which could or should be drawn from its contents.

The signatures to the partnership deed (attached to the partnership return) include that of the taxpayer. The partnership's return describes the business of the partnership as ``share trader'' and it is possible to glean from the documents attached to the return the assertion that the partnership made a loss of $2,500,062.60. This loss is particularized in the following way -

                                                 $
      Loss per financial statement               62.60
      Plus additional cost of shares:
        Amounts capitalized and used
        to distribute bonus shares.
        - Goanna Explorations
                Pty. Ltd.                 2,500,000.00
                                         -------------
                                         $2,500,062.60
                                         -------------
      

(It is convenient later to call the last-mentioned company ``Goanna''.)

Under this information is a ``Distribution Statement'' the figures of which all add up to the figure last above mentioned, and the figure opposite the name of the taxpayer is $50,001.25. This last figure is, of course, one-fiftieth of the earlier figure, and eight of the fifteen persons in the Distribution Statement, all presumably partners, appear from the figures each to have a one-fiftieth share in the partnership.

The documents attached to the partnership return include a sheet (folio 23 of the Commissioner's file) which asserts that the partnership bought 6,583,302 shares in Goanna at the price of $14,823,687 and sold 9,083,302 shares in Goanna (of which it is said the ``total cost'' was $14,823,687) for the ``gross receipt'' of $14,823,737. The document then asserts that this sale was also for the ``net amount'' of $14,823,737, and that the transaction realized a profit of $50.

This appeal comes before me in an unsatisfactory manner, because the Commissioner's counsel (Mr. Brain Shaw Q.C. with Mr. Burnside) elected to tender only the reasons of the Board and some formal documents from the Commissioner's file together with Regulations and a Government Gazette, whilst the taxpayer's counsel (Mr. Beaumont) chose to adduce no evidence at all. But I think a proper inference from the partnership return as a whole is that its draftsman is asserting that Goanna ``capitalized'' some ``amounts'' which Goanna ``used to distribute bonus shares'', and is asserting also that the amounts so capitalized and so used aggregated $2,500,000. A proper inference is that the return is asserting that the bonus issue was at par and that it aggregated 2,500,000 shares of $1 each. This accounts for the difference between the 6,583,302 shares bought and the 9,083,302 shares sold.

The reasons of the Board show that the taxpayer adduced some evidence before the Board directed to showing that the partnership had suffered a loss of $2,500,062.60 and that $2,500,000 of this loss was accounted for by the partnership treating itself as having ``paid'' for 2,500,000 bonus shares in Goanna, upon the principles of company law stated by Barwick C.J. in
Curran v. F.C. of T., 74 ATC 4296 at pp. 4299-4301; (1974) 131 C.L.R. 409 at pp. 414-416. In the first place, however, the Board did not accept any of this evidence and, secondly, none of it is before the Supreme Court either directly or by reference.

The only things put into evidence before this Court are the following things tendered on behalf of the Commissioner:

• Exhibit A - The Commissioner's File (except folios 5-10)
• Exhibit B - Extracts from Government Gazette of 27 June 1978
• Exhibit C - Copies of reg. 13 and 14
• Exhibit D - Reasons of the Board of Review

The documents comprised in Exhibit A are as follows:

• 1. The taxpayer's return of income
• 2. Schedule accompanying that return
• 3. Notice of assessment
• 4. Adjustment sheet accompanying that assessment

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  ATC 4170

• 11. - 16. Notice of Objection
• 17. Notice of Determination of Objection
• 18. Request for Reference to Board of Review
• 19. Return of Siward Traders partnership
• 20. - 47. Schedules accompanying that return -
  • 20. - 23. Share Trading Schedules
  • 24. Partners capital contribution
  • 25. Statement of Capital Distribution
  • 26. Income Tax Reconciliation
  • 27. Income re Partnership
  • 28. - 46. Partnership Agreement
  • 47. Certificate of Registration of Business Name
• 48. - 49. Statement pursuant to reg. 35(1).

So far as now relevant, the last of these documents states the Commissioner's contentions that the circumstances surrounding the bonus share issue by Goanna were not such as to result in a loss to the partnership, and that accordingly no share of partnership loss was suffered by the taxpayer, and it then states as follows:

``(2) As a consequence, the loss of $50,001 returned by the taxpayer as his individual interest in the net loss returned by the above partnership for the year of income ended 30 June 1978 was correctly adjusted to a nil loss being his individual interest in the net loss of the partnership for that year, in accordance with the provisions of sec. 92(1) of the Act.

(3) The taxpayer, as a partner in the partnership of Siward Traders, included in the partnership return as a deduction an amount in excess of the expenditure actually incurred by the partnership and he therefore became liable in accordance with sec. 226(2) to pay as additional tax an amount equal to double the difference between the tax properly payable and the tax payable upon the basis of the return furnished.''

The things ``put into evidence'', as above stated, must constitute the only matter before the Supreme Court, and I confess to being somewhat unsure as to the legal consequences of that matter, and that matter only, being in that way before the Court. There is, for example, no sworn evidence that any partnership exists, or that any commercial transactions whatsoever by any persons even took place, or that the contents of any document are true and correct.

Mere agreement between the parties or their counsel, that the matter before the Board really did involve a question of law, as distinct from merely [sic] caused the parties to debate a purely hypothetical question of law, cannot give to the Supreme Court power to decide hypothetical questions or compel it to do so. But in this case the parties by their Counsel have ``conceded'' that the matter so before this Court establishes that the partnership alleged to exist did exist, and establishes that the decision of the Board involved a question of law, and effectively casts the onus upon the taxpayer of proving erroneous the original assessment of the Commissioner against the taxpayer. On this last matter of onus Mr. Shaw faithfully and patiently took me through the authorities, with which I was totally unfamiliar, in the High Court and in the Federal Court, including
McCormack v. F.C. of T. 79 ATC 4111; (1979) 143 C.L.R. 284 and
F.C. of T. v. Mantle Traders 80 ATC 4588; (1980) 33 A.L.R. 276. It is as well that he did so, because otherwise I might well have fallen into the same errors as did Fullagar J. in
F.C. of T. v. Finn (1960) 12 A.T.D. 249; 103 C.L.R. 165.

Having regard to these later authorities and to concessions of counsel, I think that I am justified in dealing with the case upon the footing that whatever facts are above set out are established, and upon the footing that the decision of the Board involved a question of the proper construction of sec. 226(2) of the Act, and it seems to me that I am bound (by judgments binding on me) to deal with the case upon the footing that the taxpayer bears the burden of showing that the Commissioner's original assessment was in error, despite the fact that the Act describes the present procedure as an appeal, and despite the fact that the Board did nothing at all unless it varied the original assessment.

Mr. Beaumont pointed out that section 226(2) penalizes the taxpayer only when the offending claim is in ``his return'', and only when the taxpayer clearly clothes the claim in the clothing of a deduction for expenditure. He contended that ``his return'' meant the return, by the taxpayer, of the taxpayer's assessable income, and did not include a return by anybody of the taxpayer's partnership's income. Mr. Beaumont

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observed that section 92(1) of the Act provided that a partner's individual interest in a partnership loss in the year of income shall be an allowable deduction. He submitted that the substance of the words in the taxpayer's return of his own assessable income, i.e. the substance ``share in partnership income - Siward Traders Partnership - Loss $50,001'' - must be interpreted as a claim in his return for an amount as a deduction for his individual interest in a partnership loss. A partner's interest in a partnership loss is not expenditure incurred by the partner, and indeed a partnership loss is not expenditure at all.

In an admirable argument in answer, to which my brief summary following may do less than justice, Mr. Shaw began with a kind of confession and avoidance. A close examination of the Act showed, he said that the partnership return is ``his return'' (i.e. the taxpayer's return) within the meaning of sec. 226(2); and an examination of the partnership return showed, he said, that the claim in that return was for ``expenditure'' by the partnership, of its share of capitalized profit in Goanna available for dividend, which the partnership must be taken to have expended in return for bonus shares in Goanna. The claim was also excessive until the taxpayer proved otherwise. He submitted that the return of the partnership was the return of each and all of the partners, and that expenditure by the partnership was the expenditure of each and all of the partners. The partnership return thus contained a claim to deduct an amount, as and for expenditure incurred by him (albeit jointly with others), which amount was in fact excessive.

Mr. Shaw's second argument was as follows. If the relevant return is the individual return of the taxpayer, then that return must be read as if it said, ``I have an interest as a partner in Siward Traders Partnership and my share of its loss for the year is $50,001''. The reference in the individual return to the partnership and its loss must have the effect of incorporating, by reference, the partnership return into the individual return. The claim is then seen to be for expenditure by the partnership as in the first argument, and by each and all of the partners as in the first argument, and for an amount which is excessive as in the first argument.

Mr. Shaw's third argument was as follows. Even if there is no incorporation by reference, the fact that the claim in the individual return is so framed (i.e. framed as stated in the second argument) has the result that the reader is entitled, and indeed compelled, to go to the partnership return to ascertain how the partnership loss was incurred, and in particular to ascertain whether or not ``it was for expenditure'' [sic]. If it is shown (by referring to the partnership return) to be ``for expenditure'' then sec. 226(2) attaches in respect of the individual return. (I have above twice emphasised the word ``it'' for reasons which will later appear.) One is thus entitled to look at folios 25 and 26 in the Commissioner's file (``distribution sheets'' attached to the partnership return). The words of sec. 226(2), ``as a deduction for expenditure'' should be read as including ``as a deduction for expenditure'' should be read as including ``as a deduction for a share of expenditure''. The proper analysis of the taxpayer's position is that he has claimed a deduction ``for partnership loss'', and when you look at the partnership return to see what the deduction is for, you can see that it is ``for expenditure''. (The emphasis is again my own.) You ask, is this particular claim by the taxpayer, for partnership loss, a claim for a deduction for expenditure? - and examination of the material in the partnership return supplies in the present case an affirmative answer.

Finally, Mr. Shaw asserted that the onus is upon the taxpayer to show that the deduction claimed in his own return was not for expenditure, and there was no onus upon the Commissioner to demonstrate that it was for expenditure.

In my opinion sec. 226(2) has no application in respect of any claim for deduction made in the partnership return, and no application to the taxpayer's claim in his individual return for a deduction in respect of his share of a partnership loss. In my view the words ``his return'', in the subsection, mean the taxpayer's own personal return of his own assessable income.

The subsection penalizes any taxpayer who in his return includes an amount as a deduction for expenditure incurred by him, when the amount is in excess of the statutory limit. For the purpose of the present case I think the most important word is ``as''. What is critical is the character in which the taxpayer's assertion in the return is made, rather than the true character of any item included in the return. Often the latter will conclude the former by necessary inference, but the question (elegance aside) must always be - ``what has the taxpayer

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ATC 4172

asserted this amount as?''. More fully, but only slightly more elegantly, the question must always be - ``Granted that this taxpayer has included this amount as a deduction, has he asserted it to be a deduction for expenditure incurred by him?''

If one looks at the taxpayer's return, it seems to me to be beyond argument that the taxpayer has asserted the amount to be a deduction for his individual interest in a partnership loss incurred by the partnership in the year of income (see sec. 92(1) of the Act). The partnership loss to which the taxpayer expressly refers is, by necessary implication, a partnership loss as defined in sec. 90, for there is no other basis upon which his individual interest in a partnership loss could be put forward by him as a deduction in the words his individual return uses. The partnership loss to which he refers is an excess of allowable deductions of the partnership over the assessable income of the partnership, calculated as if the partnership were a taxpayer. It was the considered view of the members of the Board, with which view I respectfully and entirely agree, that a share of a partnership's excess of deductions over the partnership's assessable income is not expenditure, however the excess came about. Indeed, a partnership's own excess of deductions over assessable income is not expenditure any more than it is assessable income. It may well be that a partnership which buys when prices are high and sells when prices are low will find that its loss at the end of the year is caused by the fact of its expenditure being higher than its income, but it is in my opinion - and with all respect to a most seductive argument - nonsense to say that its loss at the end of the year is expenditure.

As to Mr. Shaw's first argument I am quite unable to accept his major premise that the partnership return is ``his return'' for the purposes of sec. 226(2). It is one thing to say that the partnership return is the return of all the partners jointly. It is in my opinion quite another thing to say that it is the return of each and all of the partners. But be this as it may, the plain ordinary meaning of ``his return'' is the return of his assessable income. In addition there is the contrast between, on the one hand, the expression ``any return'' in sec. 226(1) and, on the other hand, the expression ``his return'' in sec. 226(2). Moreover, the history of sec. 226 strongly suggests that the return of a partnership is not included in the expression ``his return''. In sec. 67 of the Income Tax Assessment Act 1922, the person penalized was a person who, being a taxpayer ``includes in any return as a deduction an amount which is in excess of that actually expended or incurred by him''. The provision was altered into its presently relevant from by sec. 226(2) of the 1936 Act, which substituted ``his'' for ``any''.

Further, I am unable to accept Mr. Shaw's proposition that a claim ``by all the partners'' (in a partnership return), to a deduction for expenditure incurred by the partnership, either is or contains within itself any assertion at all by one partner (e.g. the taxpayer of the critical subsection) of an amount as a deduction for expenditure incurred by himself. What is claimed or asserted (or ``included'') in the partnership return is an amount as a deduction for expenditure incurred by the partnership (by all the partners jointly if you like), all on the footing that the partnership (all the partners jointly) constitutes a taxpayer. It is true that the return goes on to indicate the share or interest (in the aggregate claimed expenditure) of each partner (including the taxpayer of the critical subsection), but the partnership return is still not asserting in the partnership return that any amount relevant to the partnership return was incurred by the taxpayer partner or by any other partner separatim. No amount is claimed as, or ``included as'', a deduction incurred by him. What the critical subsection seizes upon is not any old amount which is put forward as a deduction and which happens to involve some expenditure; what it seizes upon is an amount put forward by the taxpayer as a deduction, and put forward by the taxpayer as a deduction for expenditure incurred by him; and no amount is. so put forward in the partnership return.

As to Mr. Shaw's second argument, on the footing that the relevant return is that of the taxpayer, I accept that the return must be read as if it said, ``I have an interest as a partner in Siward Traders Partnership, and my share of its loss for the year is $50,001''. His next proposition, about incorporation by reference, is somewhat unclear in content, but for the purposes of argument I can accept that the Commissioner, in construing the claim in the individual return, is entitled to look at the partnership return. But I cannot accept that the taxpayer's claim in the individual return is then seen to be for expenditure by the partnership; on the contrary it is seen even more clearly to be a

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claim of an amount as a deduction for the taxpayer's share or interest in the excess of the partnership's deductions over the partnership's assessable income. I entirely agree with the members of the Board that neither a partnership loss, nor a share or interest in a partnership loss, is expenditure, and a fortiori a claim laid by the taxpayer in the character of the second of these three things cannot possibly be treated as having been laid by the taxpayer in the character of the third of them.

Mr. Shaw's third argument must also be rejected. Whilst the Commissioner can of course look at the partnership return, there is no relevance whatever in finding out ``how the partnership loss was incurred'', in the sense in which Counsel used those words. Once it is seen that the partnership returned a loss, it is irrelevant why the loss occurred. If it did not occur at all, cadit quaestio; if it did occur, then the investigation has confirmed what was already plain on the face of the taxpayer's return, namely that he claimed his amount not as either expenditure or a share of expenditure, but as a share or interest in a partnership loss as defined by sec. 90 of the Income Tax Assessment Act.

In stating a compendious summary of Mr. Shaw's third argument, I emphasised the word ``it''. That pronoun could only refer, I think, to the partnership loss claimed in the partnership return of about $2,500,000. To ask whether a partnership loss is expenditure is merely to obscure the real question by a covering of words. One might as well ask, in respect of a different partnership business, whether a profit is those video tapes which were sold or those which were let on hire, or whether the large loss was green cheese. To ask whether the deductions factor, in a claimed partnership loss constituted by other factors as well, was to a large extent made up of expenditure, is a sensible question, but it is a different question from that intended by the Commissioner's third argument. It is, however, equally irrelevant.

Mr. Shaw's Parthian shot was that the onus is upon the taxpayer to show that the deduction claimed in his own return was not for expenditure, and that there is no onus upon the Commissioner to demonstrate that it was for expenditure. Again the words used seem to me to obscure the questions which fall to be answered. One of the necessary elements of the ``offence'' created by sec. 226(2) is inclusion by the taxpayer of an amount as a deduction for expenditure by him. It is not a necessary element that the taxpayer includes an amount which was in fact expenditure by him. If there is any question of onus at all upon a mere question of -

• (a) construction of a written return, coupled with
• (b) construction of a section of an Act -

(which I doubt) - the taxpayer here discharges that onus by proffering his own return of income, because that document satisfies me that he claimed or included or put forward the only relevant amount as being a deduction for his share of a partnership loss and certainly not as expenditure incurred by him.

Further, I doubt whether the Parthian shot falls within the grounds of the Commissioner pursuant to reg. 35 or within his grounds of appeal to this Court.

The interpretation which I have adopted of sec. 226(2) is in my opinion nothing more nor less than the plain, primary meaning of the words used in the statute. I would perceive that as the plain, primary meaning quite regardless of any rules of construction that have grown up about penal provisions and taxing statues. The words used convince me that neither the draftsman nor the Legislature directed any attention at all to returns other than the personal return of the taxpayer. But quite apart from that matter, and more importantly, the subsection deals only with amounts to which the taxpayer, in his return, ascribes or attributes the character of a deduction which falls to be made from his assessable income by reason of the impingement of legislative provisions upon expenditure. (For example, sec. 51(1) impinges upon expenditure by the word ``outgoings'', not by the word ``losses''.) And in the present case the return of the taxpayer ascribes to the relevant amount not that character at all, but rather the character of a deduction which falls to be made from his assessable income by reason of the impingement of legislative provisions upon his share or interest in a ``partnership loss'' as legislatively defined.

But, although I would reach these conclusions irrespective of any special rules of construction, I think that Mr. Beaumont was entirely right to refer me to the following words of Dixon J. in
Broome v. Chenoweth (1946) 73 C.L.R. 583 at pp. 597-598,

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because they are in my opinion applicable to the interpretation sought to be placed on sec. 226(2) by the Commissioner in the present case:

``Only by inference or deduction can the meaning [contended for] be placed upon the [legislation] and then it must be at the expense of the primary meaning of the phrases critical to the question.

In a penal provision in a taxing act such a method of interpretation is misplaced... a mere conjecture that Parliament entertained a purpose which, however natural, has not been embodied in the words literally interpreted is no sufficient reason for departing from the literal interpretation; to adhere to the literal construction unless the context makes it plain that it cannot be put on the words, is a rule especially important in cases of statutes which impose taxation.''

As I say, however, I arrive at my conclusions irrespective of any presumptions or rules of construction about taxing or penal statutes. All that such rules or presumptions do is to strengthen them.

For the foregoing reasons the appeal must be dismissed with costs.