Federal Commissioner of Taxation v Western Suburbs Cinemas Ltd

(1952) 86 CLR 102
9 ATD 452

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(Judgment by: Kitto J)

Between: Federal Commissioner of Taxation
And: Western Suburbs Cinemas Ltd

Court:

Judge:
Kitto J

Subject References:
Taxation

Judgment date: 11 June 1952

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Judgment by:
Kitto J

In this case the Commissioner of Taxation appeals against a decision of a Board of Review upholding an objection lodged by the respondent company against an assessment of the income tax payable by it in respect of income derived during the year ended 30th September 1947. (at p103)

The company carries on business as a motion picture exhibitor in six suburban theatres, including the Melba Theatre, Strathfield. The company's return of income of that year included a profit and loss account in which there was a debit of 4,463 pounds 3s. 4d., described as "Major repairs written off: Repairs as per Architect's Certificates vide Schedule 'B'". Schedule B was a document headed "Dissection of Architects Certificates Herewith", and it showed a total sum of 4,463 pounds 3s. 4d. in respect of repairs as distinguished from improvements, that total sum including 1,509 pounds 9s. 0d. in respect of the Melba Theatre, Strathfield. With Schedule B was an architect's certificate dated 1st December 1947 which certified that of a total sum of 15,066 pounds 10s. 11d. expended on account of work carried out at the Melba Theatre, Strathfield, a number of items which in fact total 1,509 pounds 9s. 0d. were expended on repairs and replacements, the balance being attributed to certain "other works". Amongst the items totalling 1,509 pounds 9s. 0d. was an item of 603 pounds 0s. 0d., which appeared thus:-

"The existing Celotex ceiling was in a bad state of repair, and it was found that the cost was not warranted as the work would be unsatisfactory in the way of repairs so a new fibro ceiling was installed. To have carried out repairs including scaffold to the old ceiling we estimate the cost would have been 603 pounds 0s. 0d." (at p103)

This item the commissioner disallowed, his disallowance of it being reflected in the adjustment sheet accompanying the notice of assessment, which stated:

"Add... Replacement of Celotex ceiling with Fibro Ceiling - Melba Theatre 603 pounds." (at p103)

The company by its public officer lodged an objection in writing against the assessment. Under s. 185 of the Income Tax Assessment Act 1936-1947 it was necessary for the objection to state "fully and in detail the grounds" relied upon. The objection contained only the following statement of grounds:-

"The grounds on which I rely are:-

1.

That the sum of 603 pounds being that proportion of cost of new fibro ceiling estimated as being cost of repairing the old Celotex ceiling at the Melba Theatre, Strathfield, should have been allowed by the Commissioner as an allowable repair.

2.

The ceiling was in a dangerous condition and the purpose of the company was to restore the ceiling to its original condition. Celotex was not and still is not available and as fibro was procurable, it was decided to use this material. The cost of repairing the existing Celotex ceiling with fibro would have been costly and the job would still not have been completely satisfactory, consequently it was decided to replace the whole ceiling with fibro. The amount of 603 pounds claimed as repairs represents the estimated cost of repairing that portion of the ceiling which was considered dangerous by Cowper, Murphy and Associates, the Company's Architects." (at p104)

The objection was disallowed and the company requested that it be referred to a Board of Review. The board by a majority upheld the objection and ordered that the assessment be amended accordingly. From that decision the commissioner appeals to this Court. The appeal is competent only if the decision of the board involved a question of law: s. 196(1). In my opinion the decision involved a question of law, the question being whether, on the facts alleged in the objection, the estimated sum of 603 pounds was in law an allowable deduction under the Act. The relevant provision of the Act is contained in s. 53(1) in these terms:-

"(1)

Expenditure incurred by the taxpayer in the year of income for repairs, not being expenditure of a capital nature, to any premises, or part of premises, plant, machinery, implements, utensils, rolling stock, or articles held, occupied or used by him for the purpose of producing assessable income, or in carrying on a business for that purpose, shall be an allowable deduction." (at p104)

Now, what the objection alleged plainly enough was that a portion of the ceiling of the Melba Theatre was considered by the company's architects to be, and in fact it was, in a dangerous condition; that it could have been repaired with celotex if that material had been available, or with fibro; but, because celotex was not available and to effect repairs with fibro would have been costly and not completely satisfactory, the company decided to replace the whole ceiling with a new fibro ceiling; this replacement cost an unspecified amount which is not claimed to be an allowable deduction; but the company claims that a lesser amount of 603 pounds is an allowable deduction, that amount being the estimated cost which would have been incurred in repairing the ceiling if it had in fact been repaired instead of being replaced. (at p105)

The evidence before me gave a picture rather different from that suggested by the company's grounds of objection. The principal witness was the company's architect Mr. Roberts, who was corroborated by the builder who installed the new ceiling. It appears that the old ceiling was mainly of an American material called Ten Test. The ceiling was not flat but consisted of a flat centre portion, and side portions sloping to the walls. The side portions were of Ten Test, and the flat centre portion consisted of lattice panels surrounded by Ten Test. The Ten Test was found by the architect, on inspection in 1946, to have become dry, buckled and of a biscuit-like brittleness. It was affixed to the ceiling joists with panel pins, many of which had drawn through the sheets of Ten Test. The lattice had become badly bent and buckled, and in many places it had left the ceiling joists. (at p105)

The architect came to the conclusion that it was really impossible to repair the ceiling at all. Ten Test was not available, but it does not appear that celotex, which was the Australian rival to Ten Test, or another material of a similar kind, caneite, was unobtainable. However, the architect would not use any material of this type for the ceiling, because experience had satisfied him that it was unsatisfactory for that kind of work. He employed, not fibro, but fibrous plaster, and with that he covered the whole area formerly covered by Ten Test and lattice. The fibrous plaster was affixed to new battens, which in turn were fixed to new ceiling joists: and the result was an entirely new ceiling. Fibrous plaster has a much longer life than the celotex type of material; it is harder, and it also lends itself better to decorative treatment and can be moulded. The new ceiling cost more than 3,000 pounds. (at p105)

The architect gave evidence in support of the estimate of 603 pounds. Having made it clear, as I have said, that repair of the ceiling was not practicable, he said that in his opinion an expenditure of 603 pounds would have been necessary in order to prevent the ceiling being dangerous "if it had been possible to repair it". (at p105)

Even if, on this evidence, the provision of a new ceiling for the theatre should be regarded as a repair within the meaning of s. 53, I should have thought that the expenditure involved was expenditure of a capital nature and therefore not allowable as a deduction by virtue of that section. To decide whether a particular item of expenditure on business premises ought to be charged to capital or revenue account is apt to be a matter of difficulty, though the difference between the two accounts is clear enough as a matter of general statement (Sun Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337 , at p 360 ).

In this case the work done consisted of the replacement of the entire ceiling, a major and important part of the structure of the theatre, with a new and better ceiling. The operation seems to me different, not only in degree, but in kind, from the type of repairs which are properly allowed for in the working expenses of a theatre business. It did much more than meet a need for restoration; it provided a ceiling having considerable advantages over the old one, including the advantage that it reduced the likelihood of repair bills in the future. The case resembles one of the illustrations given by Rowlatt J. in Mitchell v. B.W. Noble Ltd. [1927] 1 KB 719 , at p 729. As his Lordship there observed, if you say, "I will not have a railing which perpetually falls down or wants repainting; I will abolish it and I will build a brick wall which will not fall down or will not want painting", that is a capital expenditure. The truth is, I think, that the new ceiling was an improvement to a fixed capital asset and that its cost was a capital charge. (at p106)

It is clear that this was the view taken by the draftsman of the company's grounds of objection. He did not assert that the whole cost of the new ceiling was an expenditure incurred for repairs of a non-capital nature. On the contrary, he referred to two courses which were open to the company, namely repairing that portion of the old ceiling which was considered dangerous, and replacing the whole ceiling; and he made it clear that the company had chosen the latter course in preference to the former, and accepted the view that the cost incurred was not an allowable deduction. The ground of objection which he stated was that 603 pounds was an allowable deduction because that was the amount which would have been expended if the company had decided to repair the dangerous portion of the ceiling instead of deciding to replace the entirety. To this ground the company was limited before the Board of Review by force of s. 190(a), and as a necessary consequence it is similarly limited on this appeal. I should therefore reject as incompetent, even if I did not think it erroneous, the contention advanced before me that 603 pounds should be treated as an allowable deduction on the ground that it is part of a larger sum to the whole of which s. 53 applies. The commissioner, when considering whether the objection should be allowed, could not reasonably be expected to gather from the written objection that he was being asked to apply his mind to any such contention. On the contrary, the objection invited him quite clearly to assume that the sum expended, considered as a whole, was not within s. 53. (at p107)

I turn, therefore, to the ground stated in the objection. It is supported, as I understand the argument, by alternative propostions: first, that 603 pounds would have been the cost of repair, if repair had been decided upon, and that for that reason it is right that 603 pounds should be treated as chargeable to income account; and secondly, that if the work actually involved in the replacement of the ceiling be considered in detail, it will be found that some things that were done would have had to be done even for the purpose of repair, and accordingly when the amount that was expended is analysed it will be found to include some items which would have entered into the cost of repair if the company had contented itself with repair. (at p107)

The answer to the first proposition is that when a taxpayer has two courses open to him, one involving an expenditure which will be an allowable deduction for income tax and the other involving an expenditure which will not be an allowable deduction, and for his own reasons he chooses the second course, he cannot have his income tax assessed as if he had exercised his choice in the opposite way. Section 53 is concerned with expenditure which was in fact incurred, not with expenditure which could have been incurred but was not. (at p107)

The cases of Highland Railway Co. v. Balderston (1889) 2 Tax Cas 485 and Rhodesia Railways Ltd. v. Income Tax Collector, Bechuanaland (1933) AC 368, which were relied upon in the Board of Review, provide no support for the view that where an actual expenditure is not an allowable deduction a notional expenditure may be. In the former of those cases worn-out rails and chairs on a railway line had been replaced by rails and chairs which were not only new but heavier and better. The only question which the courts were asked to consider was whether that portion of the cost which was attributed by the railway company to the superior quality of the new rails and chairs over rails and chairs similar to the old ones was an expenditure of a capital nature. No question arose in the case as to whether the amount of the expenditure which would have been incurred if rails of the same quality as the old had been used was an expenditure of a revenue nature, and certainly nothing was said which lends any countenance to the idea.

The second of the two cases cited also related to a railway line. Parts of the line were renewed so as to bring it back to normal condition but not so as to make it capable of giving more service than the original line. The Privy Council held that the expenditure was not of a capital nature, for although steel sleepers had been used in place of wooden sleepers, the renewals effected constituted no improvement. Their Lordships approved a passage from the Highland Railway Co.'s Case (1889) 2 Tax Cas 485, but only as an illustration of the contrast between the cost of relaying the line so as to restore it to its original condition (an income charge) and the cost of relaying the line as to improve it (a capital charge). This contrast is between two kinds of assumed actual expenditure.

The judgment does not support, and in fact its language is inconsistent with, the notion that if an actual expenditure was a capital charge, being for relaying the line so as to improve it, you can divide it into two parts and attribute an income character to one of those parts on the ground that a similar amount would have been expended on income account if the line had been simply relaid so as to restore it to its original condition. It is true, as one member of the Board of Review has pointed out, that from the report (1889) 2 Tax Cas, at p 492 it appears that two additional steel sleepers per rail length were introduced in carrying out the work, and the cost of these additional sleepers, which were regarded as an improvement, was charged by the appellant to capital and was not included in the sum claimed as a deduction. That does not make the case an authority for any principle of apportionment applicable here; it only shows that on the facts of that case the parties found it possible to segregate the cost of repairs actually effected which were chargeable against income from the cost of improvements actually effected which were chargeable against capital. (at p108)

The second proposition relates to some evidence given by Mr. Roberts to the effect that if the ceiling had been merely patched up some of the same items would have entered into the cost as entered into the cost of the new ceiling. These items were:-

(at p108)

But the capital or income character of expenditure actually incurred depends upon the nature of the purpose for which it was incurred. If a total expenditure is of a capital nature, so is every part of it; you cannot take a portion of the work done, such as the erection of a scaffolding and, closing your eyes to the purpose for which it was in fact erected, attribute to the cost of that portion an income nature for no better reason than that the same scaffolding would have been erected in order to serve a purpose which, if it had existed, would have made the total expenditure an income charge. (at p109)

In the result I am of opinion that, however the case is approached, the commissioner's appeal should be allowed, the decision of the Board of Review should be set aside, and the commissioner's decision to disallow the respondent company's objection should be restored. The respondent company must pay the costs of this appeal. (at p109)