Commissioner of Taxes (SA) v Executor Trustee and Agency Company of South Australia Limited [1938] HCA 69

Commissioner of Taxes (SA) v Executor Trustee and Agency Company of South Australia Limited [1938] HCA 69 - HCA 1938 case summary — Zoe

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This provision allows debts which have become bad to be written off in a year subsequent to that in which they were brought into account. It was substituted for an earlier provision corresponding with a provision which, in Gleaner Co. Ltd. v. Assessment Committee (1), had been held to limit the deduction of bad debts to debts which arose in the year in respect of which the return was made. The important provision in that case was sec. 10 of the Income Tax Law 1919 of Jamaica which prohibited any deduction in respect of any debts except bad debts proved to be such to the satisfaction of the Assessment Committee and doubtful debts to the extent that they were respectively estimated by the Assessment Committee to be bad. The Privy Council rejected the contention that the debts might be deducted, in any year in which they were found to be bad, from the profit of that year, and accepted the argument for the taxation authority that any deduction under this provision must be made in the year in which the debts had been included in the return. Referring, however, to the general principles of ascertaining profits and gains of a business, their Lordships said : - " The income that is to be returned is the net income after deducting the expenses of acquiring the same, and, but for sec. 10, it might well be argued that in the case of a business debts not actually received formed no part of the income at all, although, as is well known, the annual profits or gains of a trader are not properly measured by considering only the moneystaken. There must, in every profit and loss account, be an examination of the debts and a careful distinction between those that are good, doubtful and bad " (2). This statement involves the proposition that in the case of a trader, when his profits and gains are being ascertained, debts owed to him must be included in his income, even though it might be argued that they need not be included if the tax were imposed upon "income " and not, in terms,

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"profits " as determined by business men, with such deductions as are reasonable and proper from a business point of view, and must then apply income tax provisions to profits so ascertained, (Con- tentions as to allowances for depreciation of plant, &c., provide a good illustration.) Warrington L.J., referring to an argument of this character, in Inland Revenue Commissioners v. Von Glehn (1) said : - '' The question whether this deduction is to be allowed is one that must be determined by the rules regulating the assessment of income tax and not by rules regulating what may be allowed in the preparation either for a company, an individual, or a firm, of the balance-sheet or the profit and loss account. A firm or a com- pany carrying on business may within certain limits treat as a deduction from profits such sums as it pleases, but for the purposes of income tax the deductions which may be allowed from the gross profits are strictly regulated by the Income Tax Acts." If the relevant Act deals with a matter in a particular manner, it is quite immaterial that taxpayers prefer to deal with it in another manner. It is for this reason that I have based my judgment entirely upon the statute and upon decisions which seem to me to be in point. If I were of opinion that no clear conclusion could be drawn from the words of the statute, the position, of course, would be very different. In the third place, the argument in favour of the receipts basis was that it was "a" proper or appropriate method. No clear reply was given to the question whether the taxpayer had a right to choose his own method for himself, though it was denied that the commissioner had a right to impose a method upon him " compul- sorily "' - to use the language of the Supreme Court. But this denial was qualified by a willingness to concede that the commissioner perhaps was entitled to insist upon the earnings basis in respect of the period after the death of Dr. Carden. It was not explained why the commissioner could so insist in respect of one period and not in respect of a preceding period - except by the contention based upon estoppel, to which I have already referred. Further, the view that either method is permissible must involve one of two results : (1) that the taxpayer can change over from year to year as he chooses - a contention which has not been supported by argument (1) (1920) 2 K.B. 553, at p. 567.

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results: or (2) that, when the taxpayer has once adopted one method, he must go on for ever following the same method unless (possibly) the commissioner consents to the adoption of the other method. There are several objections to this second proposition. In the first place, the Act does not, as I read it, permit of the intro- duction of such a principle either generally or in the case of profes- sional men. Separate returns are made for each year. It has never yet been decided that the making of a return upon a particular basis for one year either entitles or binds the taxpayer to continue to make returns on the same basis for subsequent years. There are many decisions in this court in which the court has held that a long-continued practice was wrong simply because it was contrary to the terms of a taxation Act. The adoption of any other view would involve the result that the meaning (not merely the result of the application) of the Act in any particular case might vary according to the practice of the particular taxpayer concerned if that practice had not been challenged by the taxation authorities upon its initiation. Further, for reasons already stated, the commis- sioner cannot "consent" to any practice if that practice is incon- sistent with the Act. The Act contains a number of provisions which enable the commissioner to determine certain questions - for example, secs. 6 (4), 8, 9, 22 (xiv a), 22 a, 22 B, 23, 24 and other sections. If he exercises such powers and in a particular case accepts the view or contention of a taxpayer, he may be said to have given a "consent " which is effective. But it is effective, not as a consent, but as a decision ; and it is effective only by reason of the express terms of the statute. If there is an imperative provision in the statute, the commissioner is bound to obey it, and he cannot, by any process of consent, in effect repeal it in the case of any taxpayer. If, upon the true construction of the Act, a professional man is bound to declare his profits and gains upon an earning basis, the fact that he has, in the past, declared them upon a receipts basis is irrelevant in relation to any return which is within any time limit permitted by the Act for reconsideration or re-assessment.

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in the return which he made he did not include income represented by the difference between that computed by the receipts method which he followed and the amount computed by the earnings method, and that it might, therefore, be said that he failed to furnish a return in respect of that income. It does not appear that the amounts resulting from a computation of income on a receipts basis for that particular year was less than the amount computed on an earnings basis and there is no reason for supposing that it would be so. But. this consideration may be put on one side as raising a question of fact which might require investigation. Resting upon the view that there was on the part of Dr. Carden a failure to furnish a return in respect of some income of that year, the commissioner contends that such a failure is enough to fulfil the condition laid down by the last words of sub-sec. 1 of sec. 42. He begins by attaching the words "in respect of which" to the word "income" and not to the last antecedent, viz., the word " period." With this foundation of syntax as a starting point, he makes the expression " the income of any period " include any part of the income derived in the period. I am unable to adopt this interpretation of the clause. The sub-section is dealing with periods. When it reaches the longest retrospective period, it introduces a condition that the deceased shall have failed to furnish a return. The natural meaning of these words is failure to furnish any return of income. There is a clear distinction between omitting items of income or understating income in a return and failing to furnish a return. This distinction the Act makes in terms. Sub-sec. 1 of sec. 64 provides that every taxpayer who fails to furnish any return shall be guilty of a misdemeanour ; sub-sec. 3 says that, notwithstanding sub-sec. 1, a taxpayer who fails to include in his return any income or includes an amount of expenses in excess of that incurred shall pay additional tax. It is possible that sub-sec. 1 of sec. 64, which refers back to sec. 63, is speaking of a failure to furnish a return setting forth a full and complete statement of income. But there is no such reference in sec. 42 (1) and sec. 64 clearly marks the distinction. Further, what I should take to be the natural sense of the expression is borne out by the grammar. For prima facie the grammatical antecedent of the relative "which," in the expression "in respect of which," is the

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there is nothing analogous to a stock of vendible articles to be acquired or produced and carried by the taxpayer, where outstand- ings on the expenditure side do not correspond to, and are not naturally connected with, the outstandings on the earnings side, and where there is no fund of circulating capital from which income or profit must be detached for actual enjoyment, but where, on the contrary, the receipts represent in substance a reward for professional skill and personal work to which the expenditure on the other side of the account contributes only in a subsidiary or minor degree, then I think according to ordinary conceptions the receipts basis forms a fair and appropriate foundation for estimating professional income. But this is subject to one qualification. There must be continuity in the practice of the profession. To this qualification it is necessary to return. Both in Great Britain and Australia it has been a common practice to return and to assess professional incomes upon a receipt basis. There is little judicial authority dealing with the practice. But in Commissioners of Inland Revenue v. Morrison (1), both Lord Clyde and Lord Morison appear to me to have treated the practice as well founded. The case related to a professional engineer's business. Lord Clyde said : - " In assessing the profits of such a professional business as this, one or other of two modes of computation are in use, which have, no doubt, been found alterna- tively convenient and appropriate according to particular circum- stances. It is obvious that the usual mode which applies to the assessment of the profits of a trading business which buys and sells, or to a manufacturing business which buys raw material and makes it up and sells the finished product, would not be practically capable of application to an ordinary professional business in which the professional man markets nothing but his own services and ingathers nothing but professional fees. The two alternative modes of com- putation are known as the 'cash' basis mode and the ' earnings' basis mode. According to the first, the profits of the business are estimated according to the excess of the actual cash receipts during the year over the cash outlays and expenses actually disbursed or paid during the year. This mode takes no account of what are called ' outstandings,' that is, fees earned but not yet ingathered, (1) (1932) 8.C. 638 ; 17 Tax Cas. 325.

At a glance

Court

Decision date

Before

Source

Judgment (277 paragraphs)

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