Federal Commissioner of Taxation v. Raymor (N.S.W.) Pty. Limited

Judges:
Beaumont J

Court:
Federal Court

Judgment date: Judgment handed down 7 May 1990.

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Beaumont J.

Before the Court is a notice of motion by the appellant, the Commissioner of Taxation, filed on 11 April 1990, for leave to amend its notices of appeal in these matters by adding an additional ground of appeal. The Commissioner has appealed to a Full Court from a judgment of a judge of the Court [reported at 89 ATC 5173]. The jurisdiction of a single judge to entertain an application of the present kind, made in the context of an appeal to a Full Court, was explained by Smithers J. in
Mitchelson v. Mitchelson (1979) 24 A.L.R. 522 at p. 523. The present application, which is opposed by Raymor (N.S.W.) Pty. Ltd., the taxpayer, and the respondent to the appeal, arises in the following circumstances.

By notice of assessment issued on 18 February 1986, the Commissioner gave the taxpayer notice of assessment of income tax in respect of the year ended 30 June 1984. The adjustment sheet which accompanied the notice of assessment was as follows:

``The following adjustments have been made to the income returned for the year ended 30 June 1984

                                                    $
      Taxable income as returned                  64,071
      ADD
      Deduction for prepayment of
      trading stock disallowed                   600,113
                                                 -------
      Adjustment taxable income                  664,184
                                                 -------''
          

(emphasis added)

A similar adjustment sheet was issued in respect of the year ended 30 June 1985.

The taxpayer objected against the assessments, claiming, inter alia, that the amount referred to in the adjustment sheet as ``prepayment of trading stock'' should have been allowed as a deduction as a ``trading stock expense''. In its notice of objection, the taxpayer stated, inter alia:

``8(a) No provision of the Act authorised, entitled or empowered the Commissioner to disallow as an allowable deduction in calculating the taxable income of the Taxpayer for the Year of Income and whether in whole or in part the said sum.

8(b) In particular:

• (i) nothing in Part IVA of the Act so authorised, entitled or empowered the Commissioner (and the Commissioner has in fact made no determination pursuant to Part IVA); and
• (ii) nothing in any one or more of sections 31C, 52A, 82KJ, 82KK and 82KL of the Act so authorised, entitled or empowered the Commissioner.''

(emphasis added)

As has been seen, the notice of objection referred, inter alia, to sec. 82KJ of the Income Tax Assessment Act 1936. That provision is as follows:

``82KJ Where -

• (a) a loss or outgoing in respect of which a deduction would, but for this Subdivision, be allowable, was incurred by a taxpayer after 19 April 1978 by

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  reason of, as a result of or as part of a tax avoidance agreement;
• (b) having regard to the benefit in respect of which the loss or outgoing was incurred (but without regard to any benefit relating to the acquisition or possible acquisition of the property referred to in paragraph (c)), the amount of the loss or outgoing was greater than the amount (if any) that might reasonably be expected to have been incurred, at the time when the loss or outgoing was incurred, in respect of that benefit if the loss or outgoing had not been incurred by reason of, as a result of or as part of a tax avoidance agreement;
• (c) property has been, will be, or may reasonably be expected to be, acquired by the taxpayer or by an associate of the taxpayer as a result of, by reason of, or as part of the tax avoidance agreement; and
• (d) the consideration (if any) that was payable in respect of the acquisition of that property was less, or the consideration that may reasonably be expected to be payable in respect of the acquisition of that property is less, than the consideration that might reasonably be expected to have been payable, or to be payable, as the case may be, in respect of the acquisition of that property if the loss or outgoing had not been incurred,

notwithstanding any other provision of this Act, a deduction is not allowable to the taxpayer in respect of the loss or outgoing.''

(emphasis added)

``Tax avoidance agreement'' is defined by sec. 82KH(1) to mean:

``... an agreement that was entered into or carried out for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into or carried out, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into or carried out.''

The Commissioner decided to disallow the objections. The taxpayer referred both decisions to the Court. A direction was then given by the Court that each party file a statement of the issues in the matter as perceived by that party. Neither party raised sec. 82KJ as an issue, or even as a potential issue.

The taxpayer's statement of issues was as follows:

``1. Were the amounts of $600,113.16 and $584,388.61 claimed by the Applicant as allowable deductions in the years of income ended June 30, 1984 and 1985 respectively outgoings incurred by the Applicant in those years of income in gaining or producing the assessable income or necessarily incurred in carrying on a business for the purpose of producing such income.

2. Were the said amounts outgoings of capital or of a capital nature.

3. Whether the additional tax for late returns in the sums of $18,750 (1984) and $26,334.94 (1985) was validly imposed.''

The Commissioner's statement of issues was as follows:

``1. Whether the goods referred to in the annexures to the contracts dated 29 June 1984 and 30 June 1985, between Metal Manufactures Ltd. and the applicant (`the contracts') pursuant to which amounts of $600,113.16 and $584,388.61 (`the amounts') were paid by the applicant on or about 29 June 1984 and 27 June 1985 respectively, are trading stock within the meaning of Part 3 Division 2B of the Income Tax Assessment Act 1936.

2. Whether the goods referred to in 1. above constituted trading stock on hand of the applicant as at 30 June 1984 and 30 June 1985 respectively such that the value of those goods is to be taken into account in ascertaining the applicant's taxable income in each of those years.

3. Whether the amounts paid pursuant to the contracts were incurred by the applicant in the years ended 30 June 1984 and 30 June 1985 in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of producing such income.

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4. Whether the amounts were outgoings of capital or of a capital nature.

5. Whether the additional tax for late returns in the sums of $18,750 and $26,334.94 in respect of the years ended 30 June 1984 and 30 June 1985 was validly imposed by the respondent.''

(No question arises in the present application as to additional tax.)

The appeals were heard by Lockhart J. on 11 September 1989. In opening the appeal, senior counsel for the taxpayer conceded that there were ``significant commercial and tax benefits which flowed to the [taxpayer] from the making of the payments in June of each year for goods to be delivered in the subsequent [financial] year''.

On 19 October 1989, Lockhart J. allowed the appeals (see 89 ATC 5173). In his reasons, his Honour stated the issues in the appeals as follows (at p. 5175):

``The issues are whether the amounts of $600,113.16 and $584,388.61 claimed by Raymor as allowable deductions in the 1984 and 1985 years of income respectively, pursuant to sec. 51(1) of the Income Tax Assessment Act 1936 (`the Act'), constituted outgoings incurred by Raymor in those years of income in gaining or producing its assessable income or were necessarily incurred in carrying on its business for the purpose of producing such income; and whether the said amounts were outgoings of capital or of a capital nature.''

No mention was made of sec. 82KJ as an issue.

Later, in his reasons, Lockhart J. said (at p. 5179):

``Counsel for the Commissioner argued that it was only a fiscal benefit that was received by Raymor and that the evidence as to the commercial benefit that was said to have been derived should be disregarded or rejected. It is plain that one of the reasons for Raymor entering into its contractual arrangements and making the payments with which these proceedings are concerned was to gain the tax advantage which prepayments for trading stock would give it. For the purposes of sec. 51 the relevance of the existence of that purpose must now be doubted following the judgment of the High Court in
John v. F.C. of T. 89 ATC 4101; (1989) 63 A.L.J.R. 166 at pp. 168-171.''

This reference to fiscal benefit had nothing to do with sec. 82KJ. The Commissioner's argument, which his Honour rejected, was directed to sec. 51(1) only.

On 9 November 1989, the Commissioner filed a notice of appeal. No mention of sec. 82KJ appeared in the notice of appeal which was as follows:

``NOTICE OF APPEAL

1. The appellant appeals from the whole of the judgment of his Honour Mr Justice Lockhart given on 19 October 1989.

Grounds

2. His Honour erred in holding that the payments made by the respondent for which deductions were claimed were outgoings incurred in gaining or producing the respondent's assessable income.

3. Alternatively, his Honour erred in holding that the respondent's payments were necessarily incurred in gaining or producing such income within the meaning of sec. 51(1) of the Income Tax Assessment Act 1936.

4. His Honour erred in holding that the payments were not outgoings of a capital nature.

5. His Honour erred in holding that sec. 51(2) operated to deem the outgoings not to be outgoings of a capital or capital nature.

6. His Honour erred in finding that the respondent's purpose for making the payment was not relevant.

Orders sought

1. The judgment and orders of his Honour Mr Justice Lockhart be set aside.

2. The decision of the appellant on the respondent's objection to an assessment of income tax in respect of the year ended 30 June 1985 be confirmed.

3. The respondent pay the appellant's costs of the appeal and of the hearing before his Honour Mr Justice Lockhart.''

The Commissioner now seeks leave to amend its notice of appeal by adding the following additional ground of appeal:

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``His Honour should have held that a deduction to the respondent for its payments was precluded by the operation of sec. 82KJ of the Income Tax Assessment Act.''

The taxpayer opposes the present application.

On behalf of the Commissioner, it is submitted that the amendment should be allowed because, by reason of an oversight at the trial, the availability of sec. 82KJ was overlooked. Reliance is placed, on behalf of the Commissioner, upon the following observations of Isaacs and Rich JJ. in
Martin & Anor v. Hogan (1917) 24 C.L.R. 234 (at p. 256):

``So long as a Court is supposed to exist for the purposes of securing justice, as measured by the law, so long, in our view, must it strive to see that litigants are not to be regarded as playing a game where a momentary oversight of counsel is to be necessarily fatal. If his oversight has prejudiced the opponent, his client may have to abide by it; but if not, then the penalty if any is costs, not deprivation of substantial rights. If, as here, the plaintiff, who sets up a claim, himself discloses his radical failure to observe his contract and exhibits an incurable defect in his case, the defendant, however late he points out the defect, ought not to be denied its recognition.''

See also
Suttor v. Gundowda Pty. Ltd. (1950) 81 C.L.R. 418 at p. 438.

In my opinion, the taxpayer could be prejudiced if the Court acceded to the present application. It would be unjust, in my view, if the Court, in its discretion, were now to allow the Commissioner to raise sec. 82KJ for the first time in the proceedings. I propose to refuse the application.

In
Metwally v. University of Wollongong (1983) 60 A.L.R. 68, Gibbs C.J., Mason, Wilson, Brennan, Deane and Dawson JJ. said (at p. 71):

``It is elementary that a party is bound by the conduct of his case. Except in the most exceptional circumstances, it would be contrary to all principle to allow a party, after a case had been decided against him, to raise a new argument which, whether deliberately or by inadvertence, he failed to put during the hearing when he had an opportunity to do so.''

In
Coulton v. Holcombe (1986) 162 C.L.R. 1, the headnote reads as follows:

``Parties to litigation are bound by the conduct of their case at the trial. Hence it would be unfair on an appeal to an intermediate appellate court to allow, by discretionary amendment, the allegation by one party of new matter whereby the other party would be subjected virtually to a new trial on an issue different from that already litigated. Any other course would deny expedition, finality and justice, especially where no substantial public interest or the need for statutory interpretation was involved.''

Similarly, in
Water Board v. Moustakas (1988) 77 A.L.R. 193, Mason C.J., Wilson, Brennan and Dawson JJ. said (at pp. 196-197):

``More than once it has been held by this court that a point cannot be raised for the first time upon appeal when it could possibly have been met by calling evidence below. Where all the facts have been established beyond controversy or where the point is one of construction or of law, then a court of appeal may find it expedient and in the interests of justice to entertain the point, but otherwise the rule is strictly applied...

In deciding whether or not a point was raised at trial no narrow or technical view should be taken. Ordinarily the pleadings will be of assistance for it is one of their functions to define the issues so that each party knows the case which he is to meet.''

In the present case, the possibility that sec. 82KJ might apply here was denied by the taxpayer in its notice of objection. When the Commissioner was ordered to file his statement of the issues, he was obliged to state whether sec. 82KJ or any other tax avoidance provision was in issue if indeed the Commissioner sought to rely upon any such provision.

In
Bailey v. F.C. of T. 77 ATC 4096 at p. 4099; (1977) 136 C.L.R. 214 at p. 219, Gibbs J. said:

``A taxpayer who comes to court in a case in which it is suggested that sec. 260 applies is, as a matter of justice, entitled to know what case it is that the Commissioner intends to raise against him. The circumstance that sec. 260 must be applied to the facts whether or not the

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Commissioner holds any opinion on the subject provides no reason why the issues of fact arising in the case should not be defined. The fact that the taxpayer bears the onus of proving that the assessment is excessive makes it all the more necessary that he should be given particulars of the basis of the assessment.''

Although these observations were made of sec. 260, which is a general tax avoidance provision, they are equally applicable to a specific tax avoidance provision such as sec. 82KJ.

At the hearing before Lockhart J., the taxpayer was entitled to proceed upon the basis that the issues for determination did not involve the possible application of sec. 82KJ. It will be remembered that, in his opening to Lockhart J., senior counsel for the taxpayer conceded that tax benefits flowed from making the payments in question in June. On behalf of the taxpayer it is now said that this concession would not have been made if the taxpayer had been informed by the Commissioner that a tax avoidance provision such as sec. 82KJ was relied upon. There is, I think, real force in this submission. If the Commissioner were now to be allowed to raise sec. 82KJ the taxpayer would be prejudiced by reason of the way the taxpayer conducted the trial before Lockhart J., believing, as it was perfectly entitled to do, that sec. 82KJ would not be relied on by the Commissioner.

A similar question arose in
F.C. of T. v. Galland 84 ATC 4890; (1984) 4 F.C.R. 566. Bowen C.J. and Fisher J. said at ATC p. 4892; F.C.R. p. 569:

``Neither here nor in the Court below did the Commissioner contend that the transaction was a sham and there was no suggestion in the Supreme Court that it was void by virtue of the application of sec. 260 of the Income Tax Assessment Act... The question of the application of that section by the Commissioner was specifically raised by the taxpayer in a letter prior to the hearing. At the commencement of that hearing he expressly answered `No'. The Commissioner sought for the first time to introduce the possible impact of this section when he applied to amend his notice of appeal to raise this contention. The application was refused.''

The present application is refused, with costs.