A/asian Jam Co Pty Ltd v Commissioner of Taxation

A/asian Jam Co Pty Ltd v Commissioner of Taxation - [1953] HCA 52 - HCA 1953 case summary — Zoe

[13]

Mr. Menzies sought to maintain that the closing stock values stated in the company's returns for the years in question did conform to what is required by s. 31. His argument did not, I think, differ in substance from a view put by Mr. Robinson, a director of the company who gave evidence before me, in a letter written by him to the Commissioner during the progress of the investigation. He said that s. 31 was framed in the light of recognised practices adopted in businesses honestly and efficiently conducted. He said that a precise ascertainment of the cost of every article comprised in stock manufactured by a taxpayer must often be impracticable, and that a careful and honest estimate of the total cost of a quantity of stock was all that s. 31 really required. So far, I do not know that I would be disposed to differ from him. It is common knowledge that in many matters of accounting an honest and careful estimation is the most that can be expected or achieved. He went on to say that in the present case the company's valuation per unit of closing stock had been originally based on cost, having been adopted at a time when it did represent approximate cost. I think, as I have said, that the evidence established that there was a time when it did represent approximate cost. The next step was to say that, stock being once established and valued at cost, what took place from year to year was merely a drawing on that stock and a replacement of that stock, so that it was legitimate to regard the stock on hand at any given time, so far as it did not in fact consist of the "original" stock, as substituted for, and the equivalent of, "original" stock taken out and sold. Therefore, it was said, the stock on hand at the end of each of the accounting periods in question could be said with truth to have been valued at cost. The conception behind the argument may possibly be regarded as a sort of theoretical justification for a practice which does not seem to me in itself to stand in need of justification. But I am quite unable to accept the conclusion which is said to follow. It does not seem to me to bear any relation to the real situation or to the actual requirements of s. 31. There were, as I have said, very wide fluctuations, up and down, in the stock on hand from year to year at 30th September. Moreover, so far as jams and canned fruits are concerned, Mr. Robinson said in cross-examination that "in general, the maximum time that the company would carry stock would be two years". In any case, I am not able to read s. 31 otherwise than as requiring, at the end of every accounting period, a valuation, on one or other of the specified bases, of stocks actually on hand, and I cannot regard "cost" as meaning anything other than actual cost.

[14]

The other argument for the appellant company did not, if I have followed Mr. Menzies correctly, assert compliance with s. 31, but was directed rather to showing that the Commissioner's amended assessments were excessive, because a valuation might have been made on the basis of market selling value, and a valuation so made would have shown far lower values of closing stock than those at which the Commissioner arrived. But this argument also appears to me to be based on a foundation that is not really tenable. It did not appear to me to be applicable in any case to the tinplate. But it was said that the company sold during each year as much of its jams and canned fruits as it could sell, and that the stock which was left on hand at the end of the year represented a "surplus", the "market selling value" of which could only be ascertained by supposing the whole to be offered for sale en bloc on the last day of the accounting period. If one supposes such a sale - by auction or otherwise - I am quite prepared to accept the evidence that much lower values than those taken by the Commissioner would have been realized. But it is not to be supposed that the expression "market selling value" contemplates a sale on the most disadvantageous terms conceivable. It contemplates, in my opinion, a sale or sales in the ordinary course of the company's business - such sales as are in fact effected. Such expressions in such provisions must be interpreted in a commonsense way with due regard to business realities, and it may well be - it is not necessary to decide the point - that, in arriving at market selling value, it is legitimate to make allowance for the fact that normal selling will take place over a period. But the supposition of a forced sale on one particular day seems to me to have no relation to business reality. The case of Inland Revenue Commissioners v. Brigg Neumann & Co. [1] , was a case involving very special facts, but it was concerned with the valuation of stock, and a preliminary observation of Rowlatt J. seems to me to be in point here. He said: "It is not to be supposed that you would value - and it would not be right, of course, to do so - the cloth at a figure which you could get by having a break-up sale, or a forced sale, or anything of that sort" [2] . To attempt to arrive at market selling value on the supposition that the whole of the stock in hand must be offered for sale and sold on the last day of the accounting period is, in my opinion, to proceed on a wrong basis.

[20]

Obviously the first question to be considered is whether the company made in each year a full and true disclosure of all the material facts necessary for its assessment. I feel compelled to hold that it did not. In Federal Commissioner of Taxation v. Westgarth [3] , it was held that almost identical words in s. 20 (2) of the Estate Duty Assessment Act 1914-1942 "meant disclosure of relevant facts known to the taxpayer or of relevant beliefs held by him, and that it did not involve making the Commissioner aware of facts unknown to the taxpayer" [4] . And in Foster v. Federal Commissioner of Taxation [5] , (see especially per Latham C.J. [6] ) it was held that the words did not require the taxpayer to direct the Commissioner's attention to facts of which the Commissioner was aware. But, as Williams J. observed in Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation [7] , the expression is a very wide one. His Honour said: - "It seems to impose on a taxpayer the duty of disclosing every fact which he knows or is capable of knowing material to a correct assessment" [8] . The words "or is capable of knowing", if read quite literally, may be thought to go a little too far, but I would think that even a merely inadvertent omission of a material fact may be enough to enable the Commissioner to maintain that the full and true disclosure required has not been made. I think further - what is of some importance in the present case - that, if there is a material omission in the taxpayer's return, it is nothing to the point for the taxpayer to say to the Commissioner: "It was obvious on the face of the return that there was something I had not told you: you could have asked me about it, and, if you had done so, the information would have been immediately and willingly supplied." Here the fact that closing stocks were brought into the company's accounts on the basis of a "valuation" which did not comply with s. 31 was a fact material to the company's assessment. In respect of the first two accounting periods, this fact was simply not stated in the company's returns: no basis of valuation was disclosed. For the remaining periods the returns showed a valuation "at cost or under". This was true so far as it went: some of the stock, e.g. sugar, was in fact taken in at cost, and the figure shown for other stock was in fact below cost. But it was material, for the purposes of assessment of income tax, for the Commissioner to know that the valuation, where it was below cost, was not based either on market selling value or on the price at which the stock could be replaced. And this fact was not disclosed.

[26]

It appeared, and appears, to me to be entirely clear that reg. 43 is inconsistent with the Act. Its effect is simply to preclude the court from deciding questions which, by the provisions of the Act relating to objections and appeals, are committed to the court for decision. It seems unnecessary to say more. The only real question seemed to me to be whether it was possible, by the application of s. 46 of the Acts Interpretation Act 1901-1950, so to "read down" reg. 43 as to give it a partial valid operation. In Federal Commissioner of Taxation v. Rooney [1] , a regulation made under the Entertainments Tax Assessment Act 1916 came in question. The regulation provided that in any legal proceedings by the Commissioner for recovery of tax the certificate in writing of the Commissioner stating the amount of tax due by the defendant should be prima facie evidence of the fact stated. This was held to be a valid regulation under a power given in the same terms as those of s. 266 of the Income Tax Assessment Act. Cf. Loughnan v. Hopkins [2] . Is it possible to treat reg. 43 as including a provision that a certificate of an opinion that there has been fraud or evasion shall be prima facie evidence that such an opinion was entertained, and to hold that, to the extent to which it so provides, it is valid? It is not possible, in my opinion so to hold. Even if the regulation had in terms provided that such a certificate should be prima facie evidence only, I would not regard it as covered by Rooney's Case [1] . The subject matter of the certificate is of a different character altogether from that of the certificates which were in question in Rooney's Case [1] and in Loughnan v. Hopkins [2] . Questions of law, as well as questions of fact, are, or may be, involved in the formation of the opinion. In Rooney's Case [1] and in Loughnan v. Hopkins [2] it was quite convenient if not necessary, that the certificate should be made prima facie evidence. In either case, if the certificate was incorrect, it could without difficulty be proved to be incorrect. In the case of reg. 43, the result of making the certificate prima facie evidence might be to place the formation of the opinion beyond challenge just as effectively as if the certificate were made conclusive in terms. This would be neither necessary nor convenient for giving effect to the Act, though it might be convenient enough for other purposes and from another point of view. The opinion which I have expressed is not weakened but is reinforced by the consideration that, where under the Act the Commissioner's opinion is made a criterion of liability, the opinion can only be challenged within defined and narrow limits. When the Act makes the opinion of the Commissioner a criterion, and requires that opinion to be proved, it must be taken, in my opinion, to contemplate and require proof according to the rules of the common law, and any regulation which derogates from that requirement is inconsistent with the Act. Even, therefore, if s. 46 should be applied so as to give a partial and severable operation to reg. 43, the result would not be to produce a valid and effective law.

[28]

On my ruling that the certificate was not evidence, Dr. Coppel called Mr. Mair, the Second Commissioner, as a witness. He deposed that he had, before the amended assessments were made, formed the opinion that the avoidance of tax had been due to evasion, and he was cross-examined. Mr. Menzies argued that he had misunderstood the meaning of the word "evasion", and that he could not, on the material before him, reasonably form the opinion that there had been "evasion". It seems quite clear that it would not be enough for the taxpayer that I should myself form the opinion that the avoidance of tax was not due to evasion on the part of the taxpayer. The enactment is plainly one which "means to withdraw from the consideration of the court the correctness of the opinion of the Commissioner upon the matter in question." In order that the appeals should succeed, it is necessary that I should hold that the opinion was not in fact entertained, or that it was based upon a misconception of the meaning of the word "evasion", or that it was arrived at "capriciously, or fancifully, or upon irrelevant or inadmissible grounds" (per Rich and Dixon JJ. in Australasian Scale Co. Ltd. v. Commissioner of Taxes (Qld.) [1] : cf. Metropolitan Gas Co. v. Federal Commissioner of Taxation [2] ). In the course of a well known passage in Moreau v. Federal Commissioner of Taxation [3] , Isaacs J. said: - "Unless the ground or material on which his belief is based is found to be so irrational as not to be worthy of being called a reason by any honest man, his conclusion that it constitutes a sufficient reason cannot be overridden" [4] . I am inclined to think, with respect, that this puts the position somewhat too strongly. The position was put to me by counsel for the Commissioner very much as I have put it above, and I think it was correctly so put. The taxpayer can, of course, obtain an actual review of an opinion or discretion of the Commissioner by the Board of Review, though not by the court.

[32]

The Second Commissioner was cross-examined as to his conception of what constituted "market selling value", and some of his answers to questions were possibly given without sufficient consideration. Nothing, however, seems to me to turn on this. In examination-in-chief he stated the view which he formed in the following terms: - "I found from the report that for many years, probably twenty or thirty years, the company had adopted a value of stock on hand on the basis of what would be described as a unit value, and that the returns of the company for the years for which I was concerned in the investigation had been lodged on the same basis as the company had adopted in its accounts. Those values did not conform to any of the alternatives provided by s. 31, and in fact the returns as lodged, in my view, were misleading in that the inference could be drawn from statements in the accounts that the stock was valued at cost or lower, which would lead the assessor to believe that the return was in accordance with s. 31, namely, that the stock was valued at cost except for certain lines the market value of which had fallen below cost, and those lines were put in at market-selling value. Actually, the position was that the vastly greater proportion of the stock was brought to account at the unit value, which was considerably below cost, and only a minor proportion at cost price. The result was that the company had built up a very substantial hidden reserve of £160,000 odd. As a result, the company in the years covered by the investigation escaped tax in the vicinity of £56,000. In those circumstances, I looked at the whole of the facts. In my opinion there had been avoidance of tax and that avoidance was due to evasion." In cross-examination he said that he regarded "fraud" as involving "a deliberate attempt to suppress income", and that he had not thought that there was fraud in these cases. He was not prepared, however, to accept the view that no more than an "honest mistake" was involved. He said: - "The public officer of the company and the other executive officers must have known what the effect of their valuations of stock would be, that it was building up a very very substantial hidden reserve." He summed up his view as follows: - "I think they believed, when they put those values in, that they were not in accordance with the Act. The officials are supposed to know the law. It was a big company, and I take it they were well advised. They would know the provisions of s. 31, which required one of three valuations. They did not deny that the unit value was not cost, and made the claim that it may have been market selling value, which was rejected, and which the company did not pursue in any way during the course of the investigation. The company was given the opportunity, in respect of any lines which it considered were below cost, to submit a market selling value. It did not do so. Then the other basis was replacement cost. The unit value did not in any way answer any one of those descriptions."

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Before

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Judgment (34 paragraphs)

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