*Section 63 (1) of the Income Tax Assessment Act 1936-1971 (Cth) provided: "Debts which are bad debts and are written off as such during the year of income, and - (a) have been brought to account by the taxpayer as assessable income of any year; or (b) are in respect of money lent in the ordinary course of the business of the lending of money by a taxpayer who carries on that business, shall be allowable deductions."

CASE STATED under s. 18 of the Judiciary Act 1903-1969 (Cth).

BARWICK C.J. The Court is asked, pursuant to s. 18 of the Judiciary Act, and stated by myself. The essential facts are that the appellant, formerly Waymouth Guarantee and Discount Co. Ltd., has carried on and still carries on the business of a financier lending money and financing the purchase of goods by means of hire-purchase agreements. At all material times the appellant has held a money-lender's licence under the laws of the State of South Australia, where is situated the company's office and its principal scene of business. (at p178)

2. Until 17th April 1970 the appellant was a subsidiary of Master Butchers Ltd., a company incorporated in South Australia under the provisions of the Industrial and Provident Societies' Act 1864 (S.A.). During the time the appellant carried on business as such a subsidiary, its hire-purchase transactions were mainly entered into in respect of customers of a group of companies which manufactured or dealt in small domestic electrical appliances sold by door to door canvass throughout the States of mainland Australia. In respect of each hire-purchase transaction, the appellant kept in its accounts an item styled "interest" which represented the amount of the terms charges payable under the hire-purchase agreements less the sum allowed to the company introducing the transaction in return for an indemnity to the appellant against default by the hirer. It is conceded that the appellant returned as assessable income a total of the sums thus described as terms charges. (at p178)

3. In December 1968 inspectors were appointed under the Companies Act (S.A.) to investigate the appellant's affairs, whereupon the appellant suspended its business operations, except for carrying out certain transactions of no present moment. On 13th March 1969 the Supreme Court of the State of South Australia approved a scheme of compromise and arrangement (the scheme) in relation to the appellant, Master Butchers Ltd. and Combined Industries Ltd. - another subsidiary of Master Butchers Ltd. The scheme became operative on 17th March 1969 (the scheme commencement date). The issued capital of the appellant at that date consisted of 1,000,000 shares of $2 each paid to the sum of 30c each, of which Master Butchers Ltd. held 990,940 in its own name and had some part of the balance of the issued capital held in trust for it. There was an uncalled liability of $1,700,000 in respect of all of its shares. (at p178)

4. At that date there was due to the appellant a large sum for money lent and for balances due on hire purchase. It is conceded that at that date the appellant was the legal and beneficial owner of these book debts. (at p178)

5. The scheme was in the nature of a creditor moratorium in respect of all three companies for the space of five years from the scheme commencement date. Under the scheme a special manager was appointed for its term. He was to be the agent of each company to conduct its affairs as part of the group companies (Master Butchers Ltd., the appellant and Combined Industries Ltd.), with power, also described in the document as a duty:

1. To enter into possession of and recover all the assets of the group companies (meaning of each of the said group of companies).

2. (i) To carry on the business of Master Butchers Ltd. and of Combined Industries Ltd. in any way he should deem most advantageous and beneficial to the interests of members and scheme creditors. (ii) To wind up the affairs of the appellant and to realize its assets and to have power to carry on the appellant's business to such an extent as the manager might think necessary for the beneficial winding up of the appellant, with power to sell the undertaking of the company and the losses and structure of the appellant.

3. To take such steps by way of legal proceedings or otherwise in the name of the company as he might consider necessary to get in the debts due to the group companies.

4. To realize any asset of the group companies as he might think fit and, in consultation with the financial advisers and auditors of the group companies, write off any debt shown in the books of one of the companies.

5. To pay any dividend to scheme creditors whenever there are sufficient funds in the group companies' bank account to do so. (at p179)

6. The special manager was to pay into a nominated bank account all moneys received by the group companies. During the continuance of the scheme seventy-five per cent of the group companies' trading profit was to be available for distribution to scheme creditors who should rank equally for dividend on the amounts proven by them to be owing by any of the group companies. Provision was made for the ascertainment of the scheme creditors. (at p179)

7. The scheme provided for priority of payment amongst the scheme creditors and subject to certain priorities, the special manager was to appropriate all other moneys not otherwise required for the purposes of the scheme and available for distribution, to payment of dividends and interest to scheme creditors in the same priority and order as if the group companies were being wound up. In his dealings with third parties, the special manager was to conduct the same on behalf of the group companies under the disclosed authority of himself as special manager. It was provided that if the contingent obligation of Master Butchers Ltd. to the appellant of $1,700,000 in respect of uncalled capital were waived, the net worth of Master Butchers Ltd. as at 1st December 1968, namely $675,000, would during the continuance of the scheme be distributed to scheme creditors. However, it was provided that on and from the commencement date of the scheme, all scheme creditors who were then creditors of the appellant would become creditors of Master Butchers Ltd., and that any claim which they might have or, but for the scheme, would have had against Waymouth should thereafter be deemed to be against Master Butchers Ltd. which assumed full liability therefor. (at p180)

8. The special manager collected money from debtors of the appellant and paid it into a special manager's account as directed by the scheme. Out of this account the special manager was able to pay a dividend of twenty cents in the dollar to the scheme creditors in October 1969, and another dividend of ten cents in the dollar in June 1970. (at p180)

9. On 23rd December 1969, by an agreement in writing between Master Butchers Ltd., the appellant, the scheme manager and the Australian Guarantee Corporation Ltd. of Phillip Street, Sydney, Master Butchers Ltd. agreed to sell, and the Australian Guarantee Corporation as purchaser to buy, Master Butchers Ltd.'s shareholding in the appellant for the sum of $14,500 payable in cash against the handing over of share transfers duly executed. (at p180)

10. It was agreed that prior to the date of completion of the purchase of the shares, the appellant in reduction of its indebtedness to Master Butchers Ltd. would transfer to Master Butchers Ltd. all its assets other than debts owing to the appellant, in consideration of the release by Master Butchers Ltd. of the appellant from all debts and liabilities present and future and all claims which Master Butchers Ltd. might have against the appellant at the date of completion, including any arising after that date out of any transaction or omission prior to the date, to the extent to which the amount of those claims might exceed the total amount of money otherwise payable under the agreement by the appellant to the Master Butchers Ltd. (at p180)

11. The appellant agreed with Master Butchers Ltd. and the special manager to pay to Master Butchers Ltd. in reduction of its indebtedness as and when demanded by the manager or by Master Butchers Ltd., such amount as was equal to the net amount received by the appellant after the date of completion by way of collections of the debts due to it, up to an amount of $2,750,000 after deducting all costs and expenses incurred by the appellant in the collection or attempted collection of the debts, including commission paid to any collecting agent. (at p180)

12. The appellant also agreed with Master Butchers Ltd. and the special manager that it would pay Master Butchers Ltd. in reduction of its indebtedness an amount equal to twenty-two and a half cents in the dollar of the amount by which the deduction for debts written off in any year exceeded the amount of the pre-acquisition assessable income of that year. The expression "pre-acquisition assessable income" was defined as all amounts brought into account as assessable income of the appellant in any assessment of its income for any year and arising out of any transaction entered into by the appellant before the date of completion, including any collections of the debts whether before or after the same are written off. There were other obligations undertaken by the company to Master Butchers Ltd. to which I need not refer. (at p181)

13. On 17th April 1970 by deed the Master Butchers Ltd. released the appellant from all debts and liabilities both present and future, and all claims which the Master Butchers Ltd. might have had against the appellant at the date of completion including any arising after the date of completion out of any act, transaction or omission prior to the date of completion to the extent to which the amount of those claims exceed the total of money expressed to be due or payable by the appellant to the Master Butchers Ltd. under specified clauses of the agreement to which I have already referred. (at p181)

14. On 17th April 1970 the appellant appointed Master Butchers Ltd. its agent for a period of five years from that date to collect and receive in trust and deliver to the appellant or its banker as the appellant might direct, all sums received in respect of debts owing to the appellant at 17th April 1970, and Master Butchers Ltd. was authorized in the name of the appellant to commence proceedings for the recovery of such debts. (at p181)

15. The transfer of shares was completed on 17th April 1970 whereupon the appellant resumed the business of a financier as before. On 8th May 1970 the name of the appellant was changed to its present name. The appellant has since continued to carry on business as such a financier. (at p181)

16. In the year ended 30th June 1970 the appellant wrote off as bad debts amounts totalling $243,838 shown in its books as owing to it at the beginning of that year. The sum of $243,838 comprised:

1. The sum of $76,296 being debts due for money lent.

2. The sum of $38,620 being the total of certain hiring charges made by the

appellant in respect of hire-purchase agreements, and brought to account as assessable income in years prior to the year ending 30th June 1970.

3. Of the balance of $128,922 no more than $100,000 represented so much of hire-purchase instalments owing to the appellant which did not include any terms charges. Of this amount some $38,000 was owing by debtors who could have successfully pleaded the Statute of Limitations at the time the debts were written off. But no point is now made of this fact. (at p181)

17. The appellant in its return of income for the year ended 30th June 1970 claimed the sum of $243,838 as a deduction. The Commissioner disallowed the whole claim. (at p181)

18. In the year ending 30th June 1971 the appellant wrote off as bad debts amounts totalling $1,126,117 shown in its books as owing to it at the beginning of that year. The sum of $1,126,117 comprised:

1. A sum of $765,367 due for money lent.

2. $360,750 due under hire-purchase agreements, of which the sum of $90,861

represented the total of hiring charges which had been returned as assessable income during years prior to the year ending 30th June 1971. (at p182)

19. Of the balance of $269,889, part of the said sum of $360,750, the respondent concedes that no more than $220,000 was owing to the appellant at the date of the writing off. Again some part of the $220,000 represented debts for an amount of $35,000 in respect to which the Statute of Limitations might have been pleaded. (at p182)

20. In its return of income for the year ended 30th June 1971 the appellant claimed the sum of $1,126,117 as a deduction which the Commissioner disallowed. (at p182)

21. The questions asked by the case raise the validity of the claims to deduction in respect of these amounts. The claim as to the debts for money lent and for hiring charges is made under the provisions of s. 63 of the Income Tax Assessment Act (1936-1970)(the Act). The claim as to the other parts of the instalments due under hire-purchase agreements is made under the provisions of s. 51 of the Act. (at p182)

22. The basis of the Commissioner's disallowance of the claim to the deduction for the bad debts, for money lent and for hiring charges was that upon its proper construction the scheme extinguished the beneficial ownership of the appellant in its book debts as at the commencement date of the scheme, and that the case was governed by this Court's decision in G.E. Crane Sales Pty. Ltd. v. Federal Commissioner of Taxation [1971] HCA 75; (1971) 126 CLR 177 . In that case, upon a construction of a scheme of arrangement, the Court held that the company to whom the debts had been incurred, and whose affairs were the subject of the scheme of arrangement, had by the terms of the scheme lost its beneficial interest in those debts and had no interest in them at the time it purported to write them off as bad debts. The case turned on the construction of the scheme of arrangement and on the particular facts of that case. (at p182)

23. The submission of the Commissioner in the present case is that, under the scheme here, there was by implication an assignment by the appellant of its beneficial interest in all the book debts due to it at the date of the commencement of the scheme, and that consequently at the time it purported to write off the debts there were no such debts due to it. Counsel for the Commissioner agreed that that was the only question of law in the case and that the appellant must succeed if in truth there was no such assignment. The Commissioner begins with the concession that the legal title to the debts did not leave the appellant, and that there are no express words of assignment in the scheme of the beneficial interest in the debts. However, he insists that upon the construction of a scheme as a whole it must be concluded that the clear intention of the scheme was that the appellant should from its date cease to have any beneficial interest in the debts. (at p183)

24. After careful consideration of all that was put to the Court by counsel for the Commissioner, I am unable to find in the scheme any support for the Commissioner's submission. Indeed at every point the indications in the scheme, in my opinion, are to the contrary. The scheme, as I have said, constituted a creditors' moratorium for a given number of years. Master Butchers Ltd., of which the appellant was then a subsidiary, under the scheme "took over" the debts due by the appellant, and the creditors of the appellant, of Master Butchers Ltd. and of the other subsidiary became as they were styled "group creditors". The principal sources from which the scheme contemplated that the group creditors might receive payment of their debts or at any rate dividends in respect thereof were firstly, the amount collected from debtors of the appellant, and, secondly, part of the profits which might be made by carrying on the business of Master Butchers Ltd. by the special manager. Debts due to the appellant as they were recovered were to be paid into the special manager's account, as were seventy-five per cent of the trading profits of Master Butchers Ltd. The special manager was to take possession of the assets of the appellant including its book debts. As agents of the appellant the special manager was to recover the debts, and on recovery pay the proceeds into the nominated account as a contribution to a fund out of which dividends would be paid to the group creditors. Not merely were there no words of assignment to the special manager or to the group creditors of the debts owing to the appellant, but it was quite unnecessary for the purpose of implementing the scheme that the special manager should have any property, legal or equitable, in those debts. It was sufficient that he was put in possession of them, authorized as an agent of the appellant to collect them, and placed under an obligation to use the proceeds for the benefit of creditors. Of course, upon the collection of money in satisfaction of a debt due to the appellant, the appellant lost its property in the debt to the extent of the amount collected, and the money collected was at the disposal of the special manager. But that conclusion denies an assignment of the debt at the commencement of the scheme. (at p183)

25. It is true that under the scheme the group creditors agreed to accept whatever came to them under the scheme in satisfaction of what was due to them from any one of the three companies - the appellant, Master Butchers Ltd. and Combined Industries Ltd.: that is to say that on the expiry of the scheme the debts of the group creditors would be deemed to have been paid. But that fact does not warrant any inference that the group creditors were to be entitled to so much of the debts of the appellant as had not been collected at the termination of the scheme. No provision whatever was made by the scheme for the transfer to the group creditors of such debts at the termination of this scheme; nor was there any mechanism whereby such debts could then be collected by or on behalf of the group creditors. In my opinion, the proper construction of the scheme is that for its period the special manager as agent of the appellant was to collect as much of the debts due to the appellant at the date of the commencement of the scheme as he could, and that upon the expiry of the scheme his authority would cease; meantime the terms of the scheme determined how the moneys collected were to be dealt with. The debts remained throughout in the legal and equitable ownership of the appellant and on the expiry of this scheme could be dealt with by the appellant as its own. In my opinion, there was no assignment whatever of the debts due to the appellant either to the special manager or to the group creditors or to Master Butchers Ltd. That being so, nothing said by the Court in G.E. Crane Sales Pty. Ltd. v. Federal Commissioner of Taxation [1971] HCA 75; (1971) 126 CLR 177 has any bearing on the resolution of the present question. In my opinion the appellant was entitled to the deduction claimed in respect of the amounts written off in each year for debts due, for money lent, and for hiring charges in respect of hire-purchase agreements as claimed. (at p184)

26. The other component, the unpaid instalments of hire, clearly cannot be written off under s. 63 of the Act. But, in my opinion, they may be written off under s. 51. The appellant was in business in financing hire-purchase transactions. Following a common commercial practice it took title to the chattel, paying out the seller of it and then hiring it under hire purchase to the "purchaser". In this way the cost of the chattel became part of what may properly be described as circulating capital. The purchase of the chattel for the purpose of enabling the legal formalities of hire purchase to be observed was not the acquisition of a capital asset. It was the acquisition of something much more akin to trading stock. In my opinion upon the failure to recover the amount paid for the chattel there was a trading loss made in the gaining of assessable income, that assessable income being the hiring charges made by the hire-purchase agreement under which the chattel was made available to the hirer. (at p184)

27. Of course, it will be the actual amount thus lost by the appellant which will be deductible; that is to say the actual amount which the appellant could claim as a debt from the hirer at the time the amounts are written off. There has been no particular examination in this case of what that sum might be. But the concession by the Commissioner that certain sums were owing to the appellant at the date when the writing off took place suffices to establish what the appellant lost in not recovering the amount of the instalments of hire (excluding hire charges). (at p185)

28. We were informed by both counsel at the outset of the argument in this case that there was only one matter to be decided, namely, whether by the scheme upon its proper construction the appellant had assigned its beneficial interest in the debts due to it at the date of the commencement of the scheme. Indeed, counsel for the Commissioner in opening his argument expressly said that unless he could make good the proposition that the appellant had so assigned its beneficial interest in the debts the appellant must succeed in the case. (at p185)

29. However, notwithstanding these statements, counsel at the end of his argument raised two further points. The first point was that, upon the assumption that there had been no assignment of the beneficial interest in the debts, no precise relationship existed between the writing off of the debts, which for this purpose seems to have been regarded by counsel as the time at which the loss was incurred, and the gaining of assessable income which was the subject of the return in the particular year in which the deduction was sought to be made. The second point was that the business carried on by the appellant at the termination of the scheme was a different business to that which the appellant carried on before the scheme was entered into; or put another way that the break in the conduct of the appellant's business during the period of the operation of the scheme, prevented the business being regarded as a "continuing" business. Reliance was placed in this connexion upon the decision of this Court in Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation [1935] HCA 81; (1935) 54 CLR 295 . (at p185)

30. The first of these points is clearly insupportable. It is not possible now, to construe s. 51 to mean that the expenditures and losses to be deducted must relate precisely to the assessable income which is returned for a year in which the expenditures are made or the losses are suffered. In the application of this unduly condensed provision, it has not been possible to utilize the definite article so as to require the expenditure in question to have produced or to have assisted to produce the assessable income of the particular year of the expenditure. Nor can it be construed to require that the loss be similarly related to the assessable income of the particular year - see Commissioner of Taxation v. Finn [1961] HCA 61; (1961) 106 CLR 60 and cases there cited. (at p185)

31. Thus expenditure in a particular year, for stock which may remain on hand being progressively sold over a period of years, will be allowable in the year in which the purchase is made, although in truth it may be demonstrable that no part of that which was purchased was sold in that year and therefore that it did not directly contribute to the assessable income of that year. Equally, payment for goods which had been purchased and sold in a prior year will be allowable as a deduction in the year that payment to the creditor is made, see Ward and Co. Ltd. v. Commissioner of Taxes (1923) AC 145, at p 148 . (at p186)

32. In Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation [1935] HCA 81; (1935) 54 CLR 295 , the expression "a continuing business" was used to qualify the occasion when an expenditure not precisely related to the assessable income of a particular year was an allowable deduction. This description was intended, in my opinion, to convey the notion that in the case of an expenditure, the business of the taxpayer in respect of which the expenditure was made would probably in due course reflect in its income the proceeds or effects of that expenditure, or that it would already have done so where the expenditure was discharging an outstanding liability. I do not regard the expression "continuing" in such a temporal sense that if there were any break in the carrying on of the business for some reason, the business could not be regarded relevantly as continuous. (at p186)

33. In any case, Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation [1935] HCA 81; (1935) 54 CLR 295 was concerned with an expenditure and not with a loss. Its facts were unusual, the appellant company having discontinued its business in connexion with the recovery of metals and having become an investment company. Its assessable income in the particular year was derived wholly from investment, leaving aside some trifling transactions with which I need not concern myself. The time interval between the conclusion of the business of recovering minerals and the tax year in question was considerable. The case passed off against the taxpayer on the footing that there was no possible relationship between the expenditure and the assessable income in the tax year in question. Although the case was not concerned with the incurring of a loss, Sir John Latham observed upon the difficulty of regarding a loss as something which could gain or produce income. He suggested a reading of the section which retained the definite article. He decided that if the expenditure in question in the case were to be regarded as a loss it could not have been made in the course of carrying on a business. (at p186)

34. Perhaps it would have been more satisfactory in that case to have read the section there under consideration in a sense which related expenditure or loss to the gaining of assessable income which may have been already gained and returned or which may yet be gained and returned. See the discussion in Ronpibon Tin N.L. v. Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47, at p 56 , where it is suggested that the reference to the assessable income is really a reference to "assessable income" generally. In the case of Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation [1935] HCA 81; (1935) 54 CLR 295 , the liability to make the workers' compensation payments was undoubtedly a liability which was incurred in the gaining of assessable income upon the mineral-recovering activities. That income had already been returned. It may be that, because of the terms of the Income Tax Assessment Act, the current value of the payments to be made in the future under the Workers' Compensation (Broken Hill) Act, 1920 could not have been deducted in determining the assessable income of any one year. But the obligation to make the payments was a business liability which sprang out of the carrying on of the business which had yielded assessable income. On a construction of the section which included expenditures which related to the gaining of assessable income "generally", it might properly have been said that the later payments of compensation had been incurred as a cost of gaining the assessable income which had already been returned and taxed. But an interpretation was adopted which required a relationship of some undefined kind between the expenditure and the assessable income of the year in question. This interpretation, whilst on the one hand not requiring the tracing of the expenditure into the assessable income of the particular year, does require some relationship between the expenditure and the assessable income of that year. No particular logical prescription of that relationship is suggested in the judgment of the Court. (at p187)

35. However that may be, I do not regard that case as deciding that, even in the case of expenditure, the business in respect of which the expenditure is made must be or has already been carried on without any substantial break. It seems to me that the most that could be deduced from the construction of the section applied in Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation in relation to an expenditure is that where there has been a break in the carrying on of the business yielding the assessable income of the particular year that business must in its nature be substantially the same as that which was carried on at the earlier period of time. (at p187)

36. But in any case, in my opinion, Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation has nothing to say as to the deduction of losses. It is quite clear that a loss may not show up for years after money has been ventured in a business. The present is a very good illustration. The hire-purchase agreement was entered into, and after a period default is made not only in making the agreed instalments, but in the return of the goods. A considerable interval of time may well elapse between the date of the hire-purchase and the realization that neither the instalments nor the goods are recoverable. The loss from an accounting point of view must occur at the time when the appellant accepts the position that the debt is irrecoverable. If a hire-purchase company decided to wind up and to discontinue the granting of hire-purchase agreements in a particular year, and in a subsequent year the company in liquidation found itself unable to recover instalments of hire on the goods in circumstances which caused it to write the amount off as a bad debt, it seems to me not merely unjust but unacceptable to hold that it could not deduct that loss as a loss which it had incurred in the course of gaining assessable income. The problem of deciding whether any and if so what relationship should exist between the assessable income of the particular year and the loss, in my opinion, does not arise as it has done in relation to any expenditure. (at p188)

37. It is clear enough, it seems to me, that in order to be a relevant loss it must be a loss of money which has been put out in order to gain assessable income. It may be, and I have no need to decide that question at the moment, that if a long period of years separated the two events and meantime the company had started a different business or become an investment company as in Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation, it may be necessary if that decision is followed in such a case to say that the relationship between the two had ceased to be sufficiently proximate. It would suffice for my present purpose that I am not satisfied that, in order to be deductible, the loss which flows from carrying on a business carried on to gain assessable income need necessarily occur in a year when the company is actively carrying on that business. (at p188)

38. Further, in the present case, the facts, in my opinion, satisfy the idea of a "continuing" business except upon the very narrow view that a business is not relevantly continuing if it has had any substantial break in its continuity, a view which as I have indicated I am unable to accept. Here the scheme was entered into, it seems to me, in order to enable the companies to extricate themselves from their financial embarrassment so as to be able, if they so chose, to continue to carry on the business which had caused them the financial embarrassment. The break in years was relatively short. The fact that the company changed its name in the circumstances of this case can have no possible bearing, in my opinion, upon the nature or continuing nature of the business which the company was carrying on: nor does it matter, in my opinion, that the address from which it conducted its affairs was changed. The nature of the company's business, both before and at the conclusion of the scheme when the company resumed activities, was that of a financier, lending directly to borrowers and also servicing hire-purchase agreements. There was no change in the nature of the business at all. I conclude that in point of fact it was the same business which was carried on after a break, a break which it might be noted was not for the purpose of abandoning the business but rather to enable its continuance. (at p189)

39. Since writing the above, I have had the advantage of reading the reasons for judgment prepared by my brother Mason. Having done so, I am in agreement with his opinion that the question of construction of s. 51 is not concluded by Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation [1935] HCA 81; (1935) 54 CLR 295 and with his conclusion that the words "the assessable income" in that section mean assessable income of the taxpayer generally without regard to division into accounts periods. I am in agreement with the reasons which my brother gives for that opinion and conclusion. (at p189)

40. In my opinion, the submissions of the Commissioner are insupportable: for that conclusion I have indicated a number of reasons. The simplest is one of fact, namely that the business was the same business which was carried on after the finish of the scheme as was carried on before. But, in any case, in my view of the section a loss of the circulating capital which had been used to gain assessable income is, in my opinion, deductible. (at p189)

41. I am, therefore, of the opinion that the appellant was entitled to a deduction of the amounts written off which were conceded by the Commissioner then to have been owing. (at p189)

(a) Yes.

(b) Yes to a deduction of $76,296 for the year ending 30th June

1970 under s. 63 and to a deduction of $765,367 for the year ending

30th June 1971 under s. 63.

(c) The appellant is entitled to a deduction under s. 63,

(i) of $38,620 hiring charges written off in the year ending 30th

June 1970; and (ii) of $90,861 hiring charges written off in the year

ending June 1971; and to a deduction under s. 51 in respect of principal

(i) $100,000 written off in the year ending 30th June 1970; and

(ii) $220,000 written off in the year ending June 1971. (at p189)

43. It is unnecessary to answer specifically the question as framed. (at p189)

GIBBS J. I have had the advantage of reading the reasons for judgment prepared by the Chief Justice and need not repeat his statement of the facts of this case. Two main questions arise for consideration. The first is whether by entering into the scheme of compromise and arrangement the appellant parted with its interest in the debts at that time owed to it. If so it could not, by purporting to write off those debts, obtain a deduction under s. 63 (1) of the Income Tax Assessment Act 1936 (Cth), as amended ("the Act"): G.E. Crane Sales Pty. Ltd. v. Federal Commissioner of Taxation (1971) 126 CLR 177 . No particular form of words is necessary to create an equitable assignment, and express words of assignment need not be used for that purpose. The question whether the scheme operated as an immediate assignment of the debts owed to the appellant depends upon its proper construction. There can be no doubt that the scheme operated as an assignment of those debts that were in fact collected by the special manager. Once the amount of a debt had been received by the special manager it was his duty to pay it into the bank account out of which the dividends and other payments referred to in the scheme were required to be made. The provisions having this effect revealed an intention to divest the appellant of its beneficial interest in any debt once it was collected. However, there is nothing in the scheme to reveal any intention to deprive the appellant of the beneficial interest in any debt which the special manager did not collect. The fact that the collections were to be made by the special manager as agent for the appellant suggests that at the moment of collection the appellant was still the owner of the debts. Although the scheme speaks of the "powers and duties" of the special manager, it is apparent that it was not intended that the special manager should be obliged to exercise all the powers given to him by the scheme. Indeed, some of those powers could not be exercised consistently with others; for example, there was a power to engage or dismiss persons as employees. In particular it could not have been intended that the special manager should be bound to enter into possession of and recover all of the assets of the group companies, although he had power to do so; it was contemplated that the group companies might continue to trade and this would have been impossible if they were to have no assets. It was provided that the appellant should cease to be a party to or affected by the scheme if its structure was sold by the special manager and in any case the scheme was to determine automatically at the expiration of five years. It was possible that assets of the appellant would remain unrealized when the scheme ceased to affect the appellant or determined automatically and in the absence of any express provision to the contrary it must have been contemplated that those assets should remain in the same ownership as before - namely, in the ownership of the appellant. Moreover, the scheme did not provide for the consequences of a realization sufficient to pay all the scheme creditors in full - an event that was perhaps unlikely, and did not in fact occur, but that was not impossible, for example if Master Butchers Ltd. had made unexpectedly large trading profits. It must have been contemplated that in that event also the property in the unrealized assets should remain in the appellant. These considerations support the view that the intention of the framers of the scheme was that the appellant should remain the owner of the debts owed to it unless and until those debts were collected by the special manager and there is nothing in the scheme that points to a different conclusion. (at p191)

2. The scheme in the present case presents points of similarity to that considered in G.E. Crane Sales Pty. Ltd. v. Federal Commissioner of Taxation. In that case the taxpayer had never owned the debts in law and it was held that after the scheme took effect the taxpayer had lost its beneficial interest in the debts. It would not serve any useful purpose to compare in minute detail the provisions of the schemes in the two cases but the broad point of distinction between them may be seen from the following statement made by Walsh J. in G.E. Crane Sales Pty. Ltd. v. Federal Commissioner of Taxation (1971) 126 CLR, at p 189 as to the effect of the scheme in that case:

"It was not merely that the control and possession of the

property of the appellant, including the debts, were vested in the

scheme receiver and manager or in the scheme administrator.

But, as the case stated asserts, as from 21st June 1966 the

appellant 'was not entitled to receive or to retain amounts paid

in respect of such debts'."

There was no similar concession as to the effect of the scheme in the present case and it is not right to say, upon the proper construction of the scheme, that upon its commencement the appellant ceased to have any right to receive or retain moneys paid in respect of the debts owing to it. Moreover, the provisions of cl. 21A of the scheme which are referred to in G.E. Crane Sales Pty. Ltd. v. Federal Commissioner of Taxation (1971) 126 CLR, at pp 190, 194 had no counterpart in the scheme in the present case. (at p191)

3. It follows that the debts which were not realized by the special manager remained owing to the appellant and were therefore debts that could be written off as bad debts within the meaning of s. 63. (at p191)

4. Of the debts due to the appellant, those due by borrowers of money lent by the appellant in the ordinary course of its money-lending business clearly fell within s. 63 (1) (b). Part of the debts due by hirers of chattels from the appellant as owner under hire-purchase contracts - namely, the amount representing terms charges - had been brought to account by the appellant as assessable income and answered the description contained in s. 63 (1) (a). The balance of the latter debts, however, had not been brought to account as assessable income and was not deductible under s. 63. (at p191)

5. The submission on behalf of the appellant was that the amounts owing by hirers which had been written off as bad debts, to the extent to which they had not been brought to account as assessable income, were losses "incurred in gaining or producing the assessable income, or . . . necessarily incurred in carrying on a business for the purpose of gaining or producing such income" within s. 51 (1) of the Act. The amounts written off were of course losses. It may be assumed that the losses were incurred when the amounts were written off, that is, in the income tax years ending respectively on 30th June 1970 and 30th June 1971. The fact that the losses were incidental and relevant to the production of income in earlier years does not in itself prevent the losses from being deductible under s. 51: Herald and Weekly Times Ltd. v. Federal Commissioner of Taxation [1932] HCA 56; (1932) 48 CLR 113, at p118 ; Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation [1935] HCA 81; (1935) 54 CLR 295 ; W. Nevill & Co. Ltd. v. Federal Commissioner of Taxation [1937] HCA 9; (1937) 56 CLR 290, at p 305 ; Texas Company (Australasia) Ltd. v. Federal Commissioner of Taxation [1940] HCA 9; (1940) 63 CLR 382, at p 427 ; Ronpibon Tin N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 49, at pp 56-57 ; Commissioner of Taxation v. Finn [1961] HCA 61; (1961) 106 CLR 60, at p 68 . However, s. 51 does not authorize the deduction of losses that relate to income derived in earlier years if there has been a complete cessation of the business in the course of which that income was produced. This is established by Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation [1935] HCA 81; (1935) 54 CLR 295 . In that case Latham C.J. said (1935) 54 CLR, at pp 303-304 ;

"In this case, however, the outgoings in question have no

relation whatever to the assessable income of the years in question.

It is true that, in cases of continuing businesses, it has been

conceded (perhaps upon a not very strict construction of this or a

similar legislative provision) that expenditure may be allowed as

a deduction though it produces and is possibly designed to

produce results in the way of income in a future year and not in

the year in relation to which income is being assessed (Ward &

Co. v. Commissioner of Taxes (1923) AC 145 ). So it has also been held

that expenditure which has a direct relation to income of a past

year can be deducted in a later assessment year where it is of

such a character that, in a continuing business, it must be met

from time to time as a part of the process of gaining assessable

income (Herald and Weekly Times Ltd. v. Federal

Commissioner of Taxation [1932] HCA 56; (1932) 48 CLR 113 ). But even this

cannot assist the taxpayer in a case like this, where there has

been a complete cessation of the income-producing operations

out of which the necessity to make the outgoing arose." (at p192)

6. In the same case Dixon J. said (1935) 54 CLR, at pp 309-310 :

"A very wide application should be given to the expression

'incurred in gaining or producing the assessable income'. But

the words refer to the assessable income from which the deduction

is to be made. In a continuing business, items of

expenditure are commonly treated as belonging to the accounting

period in which they are met. It is not the practice to institute an

inquiry into the exact time at which it is hoped that expenditure

made within the accounting period will have an effect upon the

production of assessable income and to refuse to allow it as a

deduction if that time is found to lie beyond the period. And, in

the case of expenditure for which the taxpayer contracted a

liability during an earlier accounting period than that in which it

has matured, it is not the practice to consider whether its effect

upon the production of income of a still continuing undertaking

has already been exhausted . . . The expression 'in gaining or

producing' has the force of 'in the course of gaining or

producing' and looks rather to the scope of the operations or

and the relevance thereto of the expenditure than to purpose in

itself . . .

In the present case, the actual expenditure was met in the

current year. But it was completely dissociated from the gaining

or producing of the assessable income of that year . . . None of

the assessable income arose out of the business in the course of

which the taxpayer became liable to the charge. The sources

from which the assessable income did arise included no

operations in the course of which the payment was made. It was a

payment independent of the production of the income, not an

expenditure incurred in the course of its production."

(See also per Rich and Evatt JJ. (1935) 54 CLR, at p 305 , and per Starke J. (1935) 54 CLR, at p 307 .) (at p193)

7. These statements related to a provision which corresponded to the first limb of s. 51 (1). But in my opinion exactly the same considerations apply to the second limb of the subsection. If in the year in which the deduction is claimed the taxpayer is carrying on a business entirely different from that in the course of which he previously derived income it is not possible to say that a loss incurred in connexion with the business that has completely ceased is necessarily incurred in carrying on the new business. This does not mean that a temporary cessation of profit-earning operations will necessarily have the effect that losses connected with income earned in those operations in previous years cannot be deducted - cf. Queensland Meat Export Co. Ltd. v. Deputy Federal Commissioner of Taxation (Q.) (1939) St R Qd 240 . In the present case, if the appellant, in the tax years in question, was carrying on the same business as that formerly carried on, although after an interruption, the losses will be deductible provided of course that they were not of a capital nature. If, on the other hand, the appellant completely ceased to carry on its previous business, and later commenced an entirely new business, it will not be right to say that losses incurred in connexion with the earlier business are incurred in gaining or producing the assessable income of the later business or are necessarily incurred in carrying on that business. (at p193)

8. The question whether the business carried on by the appellant since about 3rd June 1970 is the same as that which it carried on before 2nd December 1968 is one of fact. It is a question with which the case stated does not deal fully or directly. It does appear that after 3rd June 1970 the appellant entered into transactions of the same general nature - namely, hire-purchase and money-lending transactions - as those that had been carried on before its activities ceased on 2nd December 1968. However, the appellant was then trading under a different name and had a different place of business. There was a complete change in the shareholding so that the appellant was under completely different control. The case does not state that the later transactions had any connexion with the earlier ones and in particular it does not reveal whether it was still true that the appellant made most of its hire-purchase agreements with customers of a particular group of companies which manufactured or dealt in small domestic appliances. The case does not state whether, in other respects, the appellant's manner of trading was the same as, or different from, that of the earlier period. The burden of proving the facts necessary to establish that the assessment was excessive lies on the appellant - s. 190 (b) of the Act. In my judgment that burden has not been discharged. The facts stated in the case do not satisfy me that the appellant, after 3rd June 1970, resumed its former business; on the contrary, the material so far as it goes suggests that it commenced a completely new business. The appellant has therefore not shown that the losses are deductible within s. 51. I should add that the fact that during the income years in question collections of debts incurred in earlier years were made by the special manager as agent for the appellant is irrelevant to the question arising under s. 51; once the debts were collected the appellant had no beneficial interest in them and the fact that the collections were made under the scheme did not mean that the appellant was still carrying on its former business. (at p194)

8. In my opinion the questions asked in the case stated should be answered as follows:

(a) Yes, to deductions under s. 63 of the Income Tax Assessment Act 1936, as amended.

(b) Yes, to a deduction of $76,296 in the year ending 30th June 1970 and of $765,367 in the year ending 30th June 1971.

(c) Yes, to a deduction of $38,620 in the year ending 30th June 1970 and of $90,861 in the year ending 30th June 1971. (at p194)

MASON J. I am in agreement with the reasons which have been given by the Chief Justice and Gibbs J. for the conclusion that the compromise or arrangement did not operate as an immediate equitable assignment of the debts owing to the appellant when the compromise or arrangement was entered into. It then follows that the debts uncollected by the special manager were debts of the appellant capable of being written off as bad debts so as to become allowable deductions in accordance with the provisions of s. 63 of the Income Tax Assessment Act (Cth), as amended. (at p195)

2. Debts constituting money lent by the appellant in the ordinary course of its money-lending business are allowable deductions under s. 63 (1) (b). So much of the debts due by hirers under hire-purchase agreements as represent terms charges which have been brought to account as assessable income are allowable deductions under s. 63 (1) (a). (at p195)

3. The appellant conceded that so much of the debts owing by hirers as have not been brought to account as assessable income cannot fall within s. 63. However, the appellant claimed that these debts, viz. outstanding terms charges not brought to account as assessable income, fall within s. 51 (1) as losses "incurred in gaining or producing the assessable income" or "necessarily incurred in carrying on a business for the purpose of gaining or producing such income". (at p195)

4. That the relevant amounts were losses incurred at the time when they were written off is not in question. What is in issue is whether they were losses which answered either one of the two statutory descriptions contained in s. 51 (1). That the losses related to the earning of income in antecedent years, and not to the earning of income in the year in which the losses were incurred, is not a disqualifying circumstance, as previous decisions of this Court have established - see Ronpibon Tin N.L. v. Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47 , and the cases there referred to. (at p195)

5. The words "losses and outgoings actually incurred in gaining or producing the assessable income", as they appear in the first alternative in s. 51 (1), were taken from s. 23 (1) (a) of the Income Tax Assessment Act 1922-1934 (Cth). The presence of the definite article before the words "assessable income" has presented a problem of interpretation in the existing section and in its progenitor. The question is whether the expression "the assessable income" refers to the assessable income of the taxpayer in the particular year in which the expenditure is incurred or the assessable income of the taxpayer generally without regard to division into accounting periods. In Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation [1935] HCA 81; (1935) 54 CLR 295 , the Court considered that the expression should be read as referring to assessable income of the year in which the expenditure was incurred, though the Court qualified the narrow effect of this interpretation by observing that the words "incurred in gaining or producing" should be understood as "in the course of gaining or producing". On this view Latham C.J. said that an expenditure designed to produce income in a past or future year was deductible where it was "of such a character that, in a continuing business, it must be met from time to time as a part of the process of gaining assessable income" (1935) 54 CLR, at pp 303-304 . See also Dixon J. (1935) 54 CLR, at p 309 . This approach derived, not from the language of the subsection, but from what was said in Ward & Co. Ltd. v. Commissioner of Taxes (1923) AC 145, at p 148 , in connexion with a differently worded provision in the Land and Income Tax Act, 1916 (N.Z.) and its application to an expenditure incurred so as to enable the taxpayer to continue to carry on business, not so as to enable it to earn income in a particular year. (at p196)

6. When the Court was subsequently called upon to consider the similar question of interpretation which arises under the provisions of s. 51 (1) in the Ronpibon Case it indicated that a different view might be taken of the provisions in their new setting. Latham C.J., Rich, Dixon, McTiernan and Webb JJ. there said of the second alternative under s. 51 (1) (1949) 78 CLR, at p 56 :

"The word 'business' is defined by s. 6 (1) to include

profession, trade, employment, vocation or calling, but not occupation

as an employee. The alternative in s. 51 (1) therefore covers a

wide description of activities. But in actual working it can add

but little to the operation of the leading words, 'losses or

outgoings to the extent to which they are incurred in gaining or

producing the assessable income'. No doubt the expression 'in

carrying on a business for the purpose of gaining or producing'

lays down a test that is different from that implied by the words

'in gaining or producing'. But these latter words have a very

wide operation and will cover almost all the ground occupied by

the alternative. The words 'such income' mean 'income of that

description or kind' and perhaps they should be understood to

refer not to the assessable income of the accounting period but

to assessable income generally. If they were so interpreted, they

would cover a case where the business had not yet produced or

had failed to produce assessable income and the alternative

would then itself suffice to authorize the deduction of a loss

made in a distinct business."

The passage indicates that the question of construction is not foreclosed by De Bavay's Case [1935] HCA 81; (1935) 54 CLR 295 and that this Court is at liberty to reach its own conclusion unfettered by what was said in De Bavay's Case. Support for this view is in my opinion supplied by the observations of Dixon C.J. in Commissioner of Taxation v. Finn [1961] HCA 61; (1961) 106 CLR 60, at p 68 , where his Honour said: "The better view, however, is that s. 51 as now drawn does not in either limb require a rigid restriction to the gaining or production of assessable income of the current year." (at p196)

7. Looking at the question de novo the case for saying that "the assessable income" in s. 51 (1) means assessable income of the taxpayer generally without regard to division into accounting periods is to my mind irresistible. There is every reason for thinking that the definite article was used so as to designate the income of the taxpayer generally rather than the income of the taxpayer in the year in question. It is inconceivable that Parliament intended to confine deductions to losses and outgoings incurred in connexion with the production of income in the year in question and to exclude losses and outgoings incurred in connexion with the production of income in preceding or succeeding years. True it is that the expression "in gaining or producing" as it applies to assessable income may allow some expansion in the relationship which it would otherwise prescribe between the loss or outgoing and the production of income in the year in which the loss or outgoing was incurred, but the expanded relationship thereby suggested is hinged upon the notion that the taxpayer is conducting a continuing business, a concept which finds no expression in the first limb of s. 51 (1) for the ascertainment of the allowance of a deduction. The preferable course, so it seems to me, is to read the reference to assessable income in the first limb of s. 51 (1) as a reference to the assessable income of the taxpayer generally. (at p197)

8. This conclusion is not an answer to all the problems of construction presented by the subsection. In the Ronpibon Case [1949] HCA 15; (1949) 78 CLR 47 the Court suggested in the passage to which I have already referred that the second limb may have a slightly wider operation than the first limb and that it may authorize the deduction of losses incurred in a distinct business. At first glance it may be thought that these observations overlook the possible limitations inherent in the words "incurred in carrying on a business for the purpose of gaining or producing such income", viz. assessable income generally. It may be argued that if the taxpayer has ceased to carry on a particular business, a loss subsequently sustained in relation to that business cannot be described accurately as a loss incurred in carrying on that business, or at any rate one incurred in carrying it on for the purpose of gaining or producing assessable income. But the soundness of the argument depends on what is meant by "incurred". A loss constituted by the writing off of a bad debt is no doubt incurred, in the sense that it is sustained, at the time when the debt is written off, and that may occur in a given case after the taxpayer has ceased to carry on as a going concern the business in which the debt was created. Yet even in such a case it may be correct to speak of the loss as having been incurred in the carrying on of the business. This is because the occasion for the loss is to be found in a transaction entered into in the carrying on of the business for the purpose of producing assessable income, that is, in the agreement by which the debt was created. Because the loss had its origin in such a transaction the loss may be said to be one which was incurred in the carrying on of the business for the purpose of producing assessable income, notwithstanding that its true character as a loss is not finally ascertained until the debt is written off. (at p198)

9. What I have said is, I think, in accord with the observations made with respect to s. 51 (1) in the later cases. Thus in the Ronpibon Case (1949) 78 CLR, at p 57 the Court stated that "to come within the initial part of the subsection it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income". So also it may be said that it is enough to satisfy the second part of the subsection that the occasion of the loss or outgoing is to be found in the carrying on of a business for the production of assessable income. In my opinion, therefore, the outstanding terms charges not brought to account as assessable income fall certainly within the second limb of s. 51 (1); it may be that they fall within the first limb but this is not a question which needs to be pursued. (at p198)

10. If this conclusion involves a departure from the literal meaning of the words used it is to be justified by reference to the context and to the unlikely and arbitrary consequence which would flow from the adoption of a literal interpretation. That a loss having its origin in the course of carrying on a business for profit should only be deductible whilst the business is still in operation, though the loss may not be ascertained until a later date, seems to me to be a strange result; so strange indeed that an intention to bring it about should not be imputed to the legislature when the statute is susceptible to a sensible alternative interpretation. (at p198)

11. On the view which I have thus far expressed it is unnecessary to decide whether the business carried on when the debts were written off was the same as the business which was carried on when the relevant hire-purchase agreements were entered into. However, having considered the question, I should state as an additional ground of decision that on the facts recited in the stated case I am satisfied that the business carried on by the appellant after its share capital was acquired by Australian Guarantee Corporation Ltd. was the same business as that which the appellant formerly carried on. Or to put the matter more precisely, the facts recited are not such as in my opinion raise an issue whereby it may be said that the appellant has failed to discharge the onus placed upon it by s. 190 (b). (at p198)

12. From all that appears the appellant later conducted the business of a money-lender and hire-purchase financier, that being the business which it had conducted before it entered into the compromise or arrangement. There is no indication that the character of the business changed in any respect. That there was a change in the personality of the shareholders and of the clients with whom the appellant did business is immaterial to the question whether a different business came into existence, so long as the character of the business remained unaltered. (at p199)

13. Nor can it be said that on the facts one could conclude that a new and distinct business came into existence in place of the business initially carried on, though having the same character as the latter. It may be acknowledged that there was a cessation in the day-to-day business activities of the appellant when it encountered financial difficulties, but as I read the facts the cessation was intended to be temporary, not permanent. The compromise or arrangement was not designed to terminate the appellant's business but to enable it to continue on the footing of the moratorium thereby provided, for it contemplated that the appellant would continue to trade. (at p199)

14. In the result I agree that the questions should be answered in the manner proposed by the Chief Justice. (at p199)

Order that the questions in the stated case be answered as follows:

(a) Was the appellant entitled in the years of income ended 30th June 1970 and 30th June 1971 to deductions under s. 51 or under s. 63 of the Income Tax Assessment Act 1936 as amended in respect of any part of the amounts of $243,838.00 and $1,126,117.00 referred to in pars 50 and 58 above.

(b) If the answer to (a) is yes, was the appellant entitled in the years of income ended 30th June 1970 and 30th June 1971 to deductions under s. 51 or under s. 63 of the Income Tax Assessment Act 1936 as amended in respect of debts in respect of money lent in the ordinary course of the business of the lending of money by the appellant.

Answer: Yes to a deduction of $76,296 for the year ending 30th June 1970 under s. 63 and to a deduction of $765,367 for the year ending 30th June 1971 under s. 63. (c) If the answer to (a) is yes, was the appellant entitled in the years of income ended 30th June 1970 and 30th June 1971 to deductions in respect of such parts of the said amounts written off as represented

(1) debts owing to the appellant by hirers of chattels from the appellant as owner under hire-purchase contracts; or (2) alternatively debts owing to the appellant by hirers of chattels from the appellant as owner under hire-purchase contracts to the extent only to which the hirers could not successfully have pleaded in bar the statute of limitations in any action which on the date of writing off might have been instituted against the hirers by the appellant for the recovery of such debts; or (3) alternatively debts owing to the appellant by hirers of chattels from the appellant as owner under hire-purchase contracts to the extent only to which the debts were in respect of hiring charges made by the appellant under such contracts and had been brought to account by the appellant as assessable income.

Answer: The appellant is entitled to a deduction under s. 63 (i) of $38,620 hiring charges written off in the year ending 30th June 1970 and (ii) of $90,861 hiring charges written off in the year ending 30th June 1971; and to a deduction under s. 51 in respect of principal sums due under hire-purchase agreements of (i) $100,000 written off in the year ending 30th June 1970 and (ii) $220,000 written off in the year ending 30th June 1971. It is unnecessary to answer specifically the question as framed.