Kolotex Hosiery (Australia) Pty Ltd v Commissioner of Taxation

Whilst on my own view of the matters such an enquiry was not open, I feel obliged in all the circumstances to express my own opinion of the case on the assumption that my earlier expressed view is unacceptable.

The situation of H. & J. in relation to the years 1960 and 1961 is that upon the actual facts and the proper construction of s. 80C (1) the Commissioner, in my opinion, could not have failed to have been satisfied that the requirements of the section had been met, unless his Honour's view of the effect of Mr. Howie's position under art. 17 of the articles of H. & J. in the year of income is accepted.

The situation of Moomba in relation to the years 1961 to 1967 inclusive turns on parts of s. 80C not dealt with by the officers and thus not influential in forming the Commissioner's state of mind at the time of assessment.

If, as the result of considering Mr. Howie's position in relation to the requirements of ss. 80A and 80C, it could properly be concluded that the Commissioner could not have been satisfied of the fulfilment of their requirements, such an examination as his Honour undertook if open to him could yield a practical result, in that it could be concluded that because he could not have been satisfied, the Commissioner was not satisfied. But if the examination resulted in the possibility that the Commissioner could have been satisfied, it is by no means clear to me what practical result would ensue. However, as I have formed a firm view myself that the Commissioner upon the actual facts could not have failed to have been satisfied, I have no need to explore the possibilities and resolve the question.

His Honour took the view that the voting rights given to Mr. Howie by art. 17 of the articles of H. & J., Levi & Hill and of the taxpayer, though personal to Mr. Howie in his capacity of governing director, formed part of the voting power in the company within the meaning of that expression both in s. 80A and s. 80C. He also took the view that, because of the paramountcy of those voting rights, H. & J. did not have a controlling interest in the taxpayer at any time during the subsistence of those voting rights in Mr. Howie, that is to say, from the introduction of art. 16 to 19 inclusive into the various articles of the companies on 7th February 1962. His Honour also took the view that because of the existence of Mr. Howie's voting rights no combination of shareholders in the company could be said to hold shares carrying between them the right to exercise not less than two-fifths of the voting power in the company, Mr. Howie being excluded on this view from the body of shareholders. Because of these views, his Honour held that the Commissioner could not have been satisfied either in respect of s. 80A or s. 80C in relation to any of the years of loss and the year of income.

A number of questions arise in connexion with these views of his Honour, with respect to all of which I would wish to express my own view. The first of these questions is the meaning of the expression "the voting power in the company".

Both ss. 80A (1) and 80C (1) use the expression "the voting power in the company" and require shares to be held which carry the right to exercise a specified proportion of such voting power. The sections, in my opinion, evidently presuppose shareholding which carries voting rights which are described as rights to exercise voting power in the company. They further presuppose that the voting right carried by each share will represent a proportion of the voting power in the company. The sections themselves do not require the company to have such a shareholding, but assuming that there are shares which carry rights to exercise voting power, the section requires such shares carrying the stated proportion of voting power to be beneficially owned for the stipulated period.

Whilst the definition of a voting interest in a company in s. 80D with its reference to "the voting power in the company" is for the purposes of that section, it is not without significance in considering the meaning of voting power in the earlier sections. The group of ss. 80A, 80B, 80C and 80D were all treated by the legislature at the same time by Act No. 103 of 1965. Though perhaps a possible view, I would not regard the definition in s. 80D as having been introduced in order to distinguish the meaning of the expression "the voting power in the company" in that section from the meaning to be given to the same expression in the other sections. Rather I would think that the expression should have a like meaning and significance throughout the group of sections of which s. 80D formed part, subject of course always to context. Indeed the relationship of s. 80D to other parts of this group of sections is to be seen for example in s. 80D (2). Also the situation of governing director with no governing director's shares as such is, I should think, sufficiently unusual not to have been within the purview of a draftsman when the choice of the expression "voting power in the company" was used in ss. 80A and 80C.

In my opinion, the proper reading of pars 80A (1) (c) and 80C (1) (b) (i) is that the shares to be beneficially held are to carry between them two-fifths of the total votes carried by the shareholding as a whole, that is to say, which can be cast by shareholders. The very nomination of a fraction of voting power to be carried by shares points strongly, in my opinion, in that direction. Further, voting power in a company is of significance only in a general meeting of shareholders at which, as I will indicate, only shareholders may cast a vote; a further consideration which points to the meaning which I would give those paragraphs. Unless the voting rights of Mr. Howie are to be accounted as part of the voting power of the shareholders they will not, in my opinion, be reckoned in the voting power in the company. In this, I respectfully differ from his Honour.

However, in my opinion, upon a proper construction of art. 17 as found in the articles of the various companies, Mr. Howie's voting rights depended upon his being both governing director and a shareholder of the company. If he were not a shareholder he could not, in my opinion, vote in a general meeting and could not control a general meeting of shareholders by the exercise of any voting rights. If he were not a shareholder and desired to control the affairs of the company he would need to resort to the powers given to him by arts. 18 and 19, for whatever effect they may have.

Article 17 does not assign a given number of shares to the governing director as governing director's shares and assign to those shares preponderant voting rights. What art. 17 does, in my opinion, is to give the governing director when he is present as a shareholder at a general meeting voting rights which are beyond those which would attach to his shareholding, whatever it might be. The articles require a governing director to be present at the general meeting "in person or by proxy". Only a shareholder may appoint a proxy to vote or attend a general meeting. Consequently, in my opinion, a governing director could not exercise any voting rights unless he was a shareholder and present in person or by proxy at the general meeting at which he desired to cast any votes. I would not construe the article as itself giving Mr. Howie a right to attend the general meeting or to appoint a proxy. It assumes his right to attend or to appoint a proxy under other articles of the company or under the general law.

Not only do the articles not purport to give the governing director a given number of shares carrying specified voting rights, but art. 17 does not nominate a number of votes which the governing director may cast at a general meeting at which he is present in person or by proxy. It is in every instance necessary to know what number of votes are cast at the meeting in a sense contrary to that which the governing director desires a general meeting to decide before the number of votes he may cast can be determined. When this is known, the article confers the rights to so many votes as equal those so cast plus one in the case of an ordinary resolution. In the case of an extraordinary or special resolution it would be necessary to know the total number of votes cast on the resolution apart from those of the governing director and the number of votes cast in the sense favoured by the governing director. The number of votes which the governing director could cast could then be calculated so as to produce the three-fourths majority on the resolution.

A contrary view as to the meaning of art. 17 to that which I have expressed would raise considerable difficulties. If Mr. Howie's voting rights were not considered to be exerciseable by him only when both governing director and a shareholder, how exactly would you compute a fraction of the voting power in the company? It may be that you could decide that the voting power in the company was the total number of votes which could be cast wholly on one side on an extraordinary or special resolution and then add to that number three-quarters of it to represent the votes which Mr. Howie could cast in order to carry the extraordinary or special resolution. Of course, he would not need so many votes to defeat it. On that footing, assuming the total shareholders' votes to be 100, two-fifths of the voting power would be 70 votes. This seems to me a highly artificial result and one which I do not think could have been contemplated by the legislation. In any case, I have no need myself to resolve what looks like a conundrum because, in my view, which I have already expressed, Mr. Howie's votes would be cast by him as a shareholder and governing director. The fact that to exercise his voting rights, Mr. Howie had currently to be governing director does not deny the proposition that it is as shareholder that he casts his votes. As he was both governing director and shareholder at all relevant times it seems to me a permissible view that his share with the voting rights which his governing directorship gave to it through art. 17 should be reckoned in the two-fifths of the shareholding. Obviously, they would always be more than that. On that footing, the conclusion would be quite clear that the requirements of the paragraphs in ss. 80A and 80C to which I have referred would be satisfied.

Mr. Howie's voting rights were thought by his Honour to preclude the conclusion that Moomba or H. & J. were at any time holding companies having a controlling interest directly or indirectly in the taxpayer. Mr. Howie had one share in H. & J. which he held on trust for Moomba. The manner in which he cast the vote attaching to that share alone might be the subject of control by equitable proceedings brought by Moomba. However, could he have been controlled as to the manner in which he cast votes, the right to which he derived from the fact that he was as well governing director? Clearly enough in the case of Moomba itself his governing director's shares could be voted in such manner as he personally thought fit. The object of his being governing director in that company with the governing director's shares was to give him personal control of that company's affairs. But the purpose of the introduction of arts. 16, 17, 18 and 19 into the articles of H. & J., Levi & Hill and the taxpayer is not so plain. The solution of that problem will determine whether or not Mr. Howie could be controlled by Moomba in the exercise of the voting rights accruing to his shareholding by reason of his governing directorship.

Two views are possible as to the intention in amending the articles to include arts. 16 to 19 inclusive. Firstly, it may be thought that this step was taken to enable Moomba itself to control those companies. On this view, Mr. Howie, the governing director of Moomba, was given the powers under this group of articles in the other companies so that he could exercise them for Moomba. Secondly, it could be thought that the purpose of that group of articles was to place Mr. Howie personally in direct control of each of the companies in the group. The choice between the two views I have found difficult. Of course it would not have mattered very much to Moomba as the family company of the Howie family whichever view were adopted. But it is a matter of moment in the application of the Act in order to determine the deductibility of the losses. My conclusion in the long run is that Moomba could have obtained equitable control of the way in which Mr. Howie cast his vote as governing director and shareholder in the other companies: that is to say, I think Mr. Howie could only exercise his voting rights in those companies in the interests of Moomba. This conclusion is consistent with the view that the share by virtue of which Mr. Howie was able to exercise his governing director's voting rights at all was clearly subject to the control of Moomba.

The significance given to the question whether Mr. Howie's voting rights were beneficially held, or were equitably the rights of Moomba, has sprung from the view that if the former is the right conclusion Mr. Howie and not H. & J. will have had a controlling interest in the taxpayer in 1960 and 1961: or, perhaps more accurately, that H. & J. will not have had such a controlling interest. There is also the position of Moomba in relation to the control of the taxpayer in the years 1961 to 1966 inclusive and the year of income. But in this case there are an additional two matters to be mentioned.

In the first place, what is the nature of the controlling interest to which these sections refer as part of the legislative insistence on a certain measure of continuity of control of the corporate taxpayer seeking to deduct prior losses from current income? In my opinion, the nature of the control with which the legislature has concerned itself is control by the exercise of voting power at a general meeting of shareholders. Thus the controlling interest required of the holding company by s. 80C (1) is a shareholding interest which, whether or not directly held in the taxpayer, enables control by the holding company of what is to occur at a general meeting of shareholders of the taxpayer. It is of course possible that a company may be controlled otherwise than by the exercise of voting power but, in my opinion, it is the control by means of voting power with which s. 80A and s. 80C are concerned. The control which the holding company must have in order to satisfy s. 80C (1) is to be by means of its interest in the subsidiary. That interest, it seems to me, is to be evidenced by and to inhere in the shareholding of the subsidiary controlled either directly or indirectly by the holding company through shareholding in intervening subsidiaries. Whilst a controlling interest in a company may not necessarily be manifested by the holding of shares in the controlled company and may be exerted through shareholding in intervening subsidiaries, it is in my opinion by means of shareholding that the interest is established. The control or controlling interest accepted in Mendes v. Commissioner of Probate Duties (Vict.) [6] , was a control or controlling interest by and inhering in shareholding. In concluding that that shareholding need not be held in the controlled company it was not said in that case that there can be a controlling interest divorced from and not exerciseable through shareholding and the voting power which it carries. It is, in my opinion, such an interest of which s. 80C (1) speaks. The inquiry whether any company had a controlling interest in the taxpayer at any time must be determined by examination of the control of a general meeting by the voting of shareholders of that company. Thus, if Mr. Howie's voting rights are exercisable without his being a shareholder, I do not think he could, in any case, be regarded as relevantly having himself a controlling interest in H. & J. or the taxpayer.

In the second place, even if Mr. Howie's voting rights as governing director and a shareholder enable him personally to determine what shall be decided in a general meeting of H. & J., is not the resultant resolution a resolution of that company and not that of Mr. Howie? In my opinion, it is what emerges from such a meeting, as a means of determining what is to occur by reason of shareholding in the taxpayer at a general meeting of its shareholders, which is part of the control of the taxpayer by H. & J., and none the less so because Mr. Howie was able to determine what H. & J. should decide. In other words, in my opinion, whatever the right conclusion as to the nature of Mr. Howie's voting rights in H. & J., H. & J. had relevantly a controlling interest in the taxpayer in the year of income. Equally Moomba itself had such a controlling interest in the years 1961 to 1966 inclusive and in the year of income, notwithstanding the dominance of Moomba by Mr. Howie by virtue of his governing director's shares. It is because of these views held by me that it would be unnecessary finally to decide whether Moomba could control the exercise by Mr. Howie of his voting rights in H. & J., although I have already expressed my view on the matter.

But art. 17 existed in the articles of the taxpayer in whose capital Mr. Howie did not have a share. Thus, conformably with the views I have expressed, he could not be held to have had a controlling interest in the taxpayer. But if contrary to my own view it is decided he had, two consequences will be observed. Firstly, as I think, Moomba could control his use of his voting rights which on the view opposed to my own would give him a controlling interest; and, secondly, if in relation to the year 1967 he held a controlling interest, and not Moomba or H. & J., s. 80C would not be applicable at all in relation to the years 1962 to 1966. He and not a company would hold the controlling interest in H. & J. in these years. The primary condition of its applicability is that there is a holding company, as described, of the taxpayer. If it is not applicable, the limitation it lays on the operation of s. 80 will not apply. However, I am unable to accept the view of my brother Mason that, because of Mr. Howie's position as governing director and the terms of art. 17, H. & J. did not have a controlling interest in the taxpayer in the year of income. In my opinion, H. & J. had a controlling interest in the taxpayer in the year of income notwithstanding its relationship with Moomba at that time and the position of Mr. Howie as governing director of Moomba and as governing director of H. & J. It follows that the Commissioner would have been bound to have been satisfied that the loss met the requirements of ss. 80A and 80C in respect of the year 1960 and also in respect of the year 1961 unless he was bound to be satisfied as to the position of Moomba in that year.

What I have already said would indicate that, in my opinion, the Commissioner was bound to be satisfied that Moomba had a controlling interest in H. & J. and in the taxpayer from February 1961 until the conclusion of the tax year 1967.

During the argument of the appeal the Commissioner made a submission that the shareholders in H. & J. who acquired their shares in 1966 had made an arrangement within s. 80B (5). Apart from the considerations I have already pointed to which limit the Commissioner in a case of this kind to his situation at the time of the making of his assessment, I agree with his Honour that the submission should be rejected. I find no evidence to support it. In fact Mr. Ohlsson, whom his Honour accepted on the point, specifically denied the making of any such arrangement.

During the year of income ended 30th June 1967 the appellant, Kolotex Hosiery (Australia) Pty. Ltd. ("Kolotex"), made an assessable income of $515,826. By its return of income for that year it claimed to deduct losses (amounting in all to $509,367) which it had incurred during the seven preceding years, 1960 to 1966. The Commissioner disallowed the claim, and assessed the taxable income at $515,826, rather than at the amount of $6,459 to which Kolotex claimed it should be reduced. An appeal was dismissed by Mason J., from whose decision the present appeal has been brought.

Section 80 (2) of the Income Tax Assessment Act 1936, as amended ("the Act"), provides for the allowance as a deduction of losses incurred by a taxpayer in any of the seven years next preceding the year of income. It is common ground that if those provisions had stood unaffected by other sections of the Act Kolotex would have been entitled to the deduction that it claimed. But by amendments made to the Act from time to time the legislature has imposed restrictions on the extent to which a company may claim as a deduction losses which it has incurred in earlier years. Stated broadly, the object of those restrictions was to prevent, or at least discourage, the practice which had become common of buying shares in "loss companies" - a practice which enabled the owner of a business, by arranging for its profits to be made by a company the shares in which the owner had newly acquired, to set off against those profits the losses made by that company in past years in a different business. The provisions of the Act which restricted the operation of s. 80 in its application to companies, and which were in force in respect of the income year in question, were those of ss. 80A to 80E which were inserted in 1964 and amended in 1965 and 1966; the sections have since been amended but I shall throughout refer to them in the form which they assumed after the amendments made in 1966. In the case of s. 80B (5), however, it is necessary to mention that notwithstanding the substitution of a new subsection by the amending Act of 1965, the subsection introduced in 1964 continued to apply in relation to contracts, agreements or arrangements entered into, or rights, powers or options granted on or before 28th October 1965 - see the Income Tax Assessment Act 1965, s. 44 (6).

Notwithstanding sections eighty and eighty aa of this Act, but subject to the next succeeding sub-section and the next four succeeding sections, a loss incurred by a taxpayer, being a company, in a year before the year of income shall not be taken into account for the purposes of section eighty or section eighty aa of this Act unless -

(b) in the case of a company that is not a private company in relation to the year of income, the Commissioner is satisfied that it is reasonable to assume,

that, at all times during the year of income, shares in the company carrying between them -

(c) the right to exercise not less than two-fifths of the voting power in the company;

(d) the right to receive not less than two-fifths of any dividends that may be paid by the company; and

(e) the right to receive not less than two-fifths of any distribution of capital of the company in the event of the winding up, or of a reduction in the capital, of the company,

were beneficially owned by persons who, at all times during the year in which the loss was incurred, beneficially owned shares in the company carrying rights of those kinds. By s. 80A (2) the Commissioner was empowered, when satisfied that at all times during the year of income shares in the company carrying the rights referred to in sub-s. (1) were beneficially owned by persons who at all times during a part of the year in which the loss was incurred beneficially owned shares in the company carrying rights of those kinds, to take into account for the purposes of s. 80 such part of the loss as he considered to be the amount of the loss that was incurred during that part of the year. Section 80B (1) provided that for the purposes of the application of s. 80A in determining whether a loss incurred by a company in a year before the year of income is to be taken into account, the succeeding provisions of s. 80B have effect. Subsection (5) of s. 80B (as amended in 1965 and 1966) read as follows: Where -

(a) a person who beneficially owned any shares in the company at all times during the year in which the loss was incurred also beneficially owned shares in the company at any time (in this sub-section referred to as "the relevant time") during the year of income;

(b) before or during the year of income, that person entered into a contract, agreement or arrangement, or granted or was granted a right, power or option (including a contingent right, power or option), that, in any way, directly or indirectly, related to, affected, or depended for its operation on -

(i) the beneficial interest of that person in the last-mentioned shares, or the value of that interest;

(ii) the right of that person to sell, or otherwise dispose of, that interest, or any such sale or other disposition;

(iii) any rights carried by those shares, or the exercise of any such rights; or

(iv) any dividends that might be paid, or any distribution of capital that might be made, in respect of those shares, or the payment of any such dividends or the making of any such distribution of capital; and

(c) the contract, agreement or arrangement was entered into, or the right, power or option was granted, for the purpose, or for purposes that included the purpose, of enabling the company to take into account for the purposes of section eighty or section eighty aa of this Act a loss that the company had incurred in a year before the year in which the contract, agreement or arrangement was entered into or the right, power or option was granted or a loss that the company might incur in that last-mentioned year,

the Commissioner may, subject to the succeeding provisions of this section, treat those shares as not having been beneficially owned by that person at the relevant time. It is unnecessary to set out the provisions of sub-s. (5) in the form they took before their amendment, for it is not suggested that those provisions could have been applied by the Commissioner to the circumstances of the present case. Section 80C (1) read as follows: Notwithstanding sections eighty, eighty aa and eighty a of this Act but subject to this section and to section eighty e of this Act, where a company in which no other company had a controlling interest (in this section referred to as "the holding company") had a controlling interest in another company (in this section referred to as "the subsidiary company") at any time during a year in which a loss was incurred by the subsidiary company, the loss shall not be taken into account for the purposes of section eighty or section eighty aa of this Act unless the Commissioner is satisfied that, at all times during the year of income of the subsidiary company -

(a) the holding company had a controlling interest in the subsidiary company; and

(b) shares in the holding company carrying between them -

(i) the right to exercise not less than two-fifths of the voting power in the company;

(ii) the right to receive not less than two-fifths of any dividends that may be paid by the company; and

(iii) the right to receive not less than two-fifths of any distribution of capital of the company in the event of the winding up, or of a reduction in the capital, of the company,

were beneficially owned by persons who, at all times during the year in which the loss was incurred by the subsidiary company, beneficially owned shares in the holding company carrying rights of those kinds. Section 80C (2) was similar in aim to s. 80A (2) and empowered the Commissioner in the circumstances mentioned in the subsection to take into account such part of the loss incurred in any year as he considered to be the amount incurred during the relevant part of the year. Section 80C (3) was intended to enable (inter alia) s. 80B (5) to be applied for the purposes of s. 80C; it read: For the purposes of the application of either of the last two preceding sub-sections, the provisions of sub-sections (3) to (8), inclusive, of the last preceding section apply in relation to the holding company and in relation to every company that was at any relevant time interposed between the holding company and the subsidiary company as if references in those sub-sections to the company were references to the holding company or to the interposed company, as the case may be. Section 80C (4) read as follows: This section does not apply for the purpose of determining whether a loss, or part of a loss, incurred by the subsidiary company in a year before the year of income is to be taken into account for the purposes of section eighty or section eighty aa of this Act if the next succeeding section applies in relation to the company in relation to the year of income. The general purpose of s. 80D is sufficiently indicated by its sidenote, which reads: "Tracing beneficial ownership of shares through a series of companies for the purposes of section 80A." However, s. 80D is not of general application; it is not doubted that it would have applied to the present case only if Kolotex had requested the Commissioner to apply it.

Both s. 80A and s. 80C state conditions which must be fulfilled before a taxpayer to whom the section applies may treat losses in previous years as an allowable deduction. Section 80A applies to a taxpayer which is a company and s. 80C to a taxpayer which is a "subsidiary company" within the meaning of that section. The fact that each section is negative in form, and provides that the loss shall not be taken into account unless the condition therein stated is fulfilled, suggests that when the taxpayer is a "subsidiary company" both sections are applicable and both conditions must be fulfilled before a deduction may be allowed. However, it is provided in s. 80A that that section is subject (inter alia) to s. 80C whereas the provisions of s. 80C are expressed to take effect notwithstanding those of s. 80A. These provisions, in my opinion, rather indicate that if s. 80C applies s. 80A does not. This question need not be resolved in the present case. It is quite clear that if Kolotex was a "subsidiary company" in any year in which a loss was incurred, a deduction in respect of that loss cannot be claimed unless the condition stated in s. 80C has been fulfilled, and that if in any year of loss Kolotex was not a "subsidiary company", no deduction will be available unless the condition stated in s. 80A has been satisfied.

To fulfil the condition stated in s. 80A, Kolotex, being a private company, had to satisfy the Commissioner that at all times during the year of income shares in Kolotex carrying the specified rights (and particularly "the right to exercise not less than two-fifths of the voting power in the company") were "beneficially owned by persons who, at all times during the year in which the loss was incurred, beneficially owned shares" in Kolotex carrying rights of those kinds. Under s. 80C if in any year during which Kolotex incurred a loss Kolotex was a "subsidiary company" the loss will only be an allowable deduction if the Commissioner was satisfied that at all times during the year of income the "holding company" had a "controlling interest" in Kolotex and shares in the holding company carrying between them the rights specified (including the right to exercise not less than two-fifths of the voting power) were beneficially owned by persons who, at all times during the year in which the loss was incurred, beneficially owned shares in the holding company carrying rights of those kinds. Neither section makes the entitlement to a deduction depend upon the existence of a state of facts or of mixed law and fact, found by the court to which an appeal is brought. The condition is not fulfilled unless the Commissioner is satisfied of the requisite matters. However, a decision by the Commissioner that he is not satisfied is open to review. In the present case it was submitted on behalf of Kolotex that it should be held that the Commissioner was in fact satisfied of the matters stated in ss. 80A and 80C and alternatively that if he did not form the necessary satisfaction his decision should be reviewed. I am very doubtful whether the first of these submissions is open, having regard to s. 190 (a) of the Act. The notice of objection appears to have been drawn on the basis that the conditions laid down in ss. 80A and 80C are satisfied if the requisite matters exist in fact, whether or not the Commissioner was satisfied of their existence. However, it is unnecessary to dispose of the first argument on this narrow ground.

Before dealing further with these questions it is desirable to give an account of the facts. During the year ended 30th June 1960 Kolotex, then called Partition Industries Pty. Limited, was one of a group of companies which were engaged in the business of marketing and selling partitions and wall coverings. The principal shareholders in the group were Mr. Josephson and Mr. and Mrs. Stanton, but during that year Mr. J. S. Howie decided to invest in the group and in consequence acquired shares in the companies. On 30th June 1960, the shareholdings in the various companies in the group, so far as material, were as follows. There were 152 issued shares in Kolotex, of which Levi & Hill Pty. Ltd. ("Levi & Hill") held 148 and Mr. Howie held one. There were 15,502 issued shares in Levi & Hill, of which 14,998 were held by H. & J. (Holdings) Pty. Ltd. ("H. & J.") and one by Mr. Howie. In H. & J. 22,770 ordinary shares had been issued; of these 18,394 were held by five shareholders (Mr. Josephson, Mr. and Mrs. Stanton, Mr. Sharpe and Mr. Reid), 3,999 were held by Moomba Pty. Ltd. ("Moomba"), and one by Mr. Howie. Also, 250 "B" ordinary shares and 500 twelve and a half per cent preference shares were held by Mrs. Maxwell. Moomba was a company controlled by Mr. Howie who held 2,000 governor's shares in it; the other shares were held by a number of family companies.

The group met with severe trading losses and Mr. Howie decided to take control of all the companies, to inject further capital into the group and to make Moomba the holding company. By 30th June 1961 Levi & Hill had become the beneficial owner of all the issued shares in Kolotex, H. & J. had become the beneficial owner of most of the issued shares in Levi & Hill (during the following year it became the beneficial owner of all those shares) and Moomba had become the beneficial owner of all the issued shares in H. & J. In each company the beneficial owner was the registered holder of most of the shares, and the remaining shares to which it was beneficially entitled were held by other persons in trust for it. In particular, Mr. Howie remained the holder of one share in Kolotex, one share in Levi & Hill and one share in H. & J.; he held the share in Kolotex in trust for Levi & Hill, the share in Levi & Hill in trust for H. & J. and the share in H. & J. in trust for Moomba. It may be inferred from the evidence, which is far from precise, that these trusts came into existence during 1960 and continued in force so long as Mr. Howie held the shares. Mr. Howie still held the governor's shares in Moomba, but he held those shares beneficially. There was no material alteration in the shareholdings in any of these companies before 30th June 1965.

However, on 7th February 1962 by special resolutions passed at extraordinary general meetings of members of Kolotex, Levi & Hill and H. & J., Mr. Howie was appointed governing director of each of those companies and the articles were amended to give him extensive powers. The amendments took the form of the insertion of the following articles:

2. John Stephens Howie shall be Governing Director of the Company and shall hold such office until he dies or resigns or becomes disqualified pursuant to Article 29 (q) hereof.

3. The said John Stephens Howie when present in person or by proxy or attorney at any general meeting of the Company and both on a show of hands and on a poll shall have the right to as many votes in the case of an ordinary resolution as shall constitute a majority of the votes given personally or by proxy or attorney on such resolution and in the case of an extraordinary or special resolution as shall constitute a three-fourths majority of the votes given personally or by proxy or attorney on such resolution.

4. The said John Stephens Howie shall notwithstanding anything in these Articles contained and so far as the law allows have power to exercise all the powers conferred upon the Company and/or its shareholders by the Memorandum of Association and by these Articles.

5. The decision of the said John Stephens Howie as to all matters affecting the Company shall be paramount and he may veto any resolution of the Company howsoever made or carried.

Mr. Howie already had similar rights in Moomba - they were conferred by the articles upon the holder of the governor's shares.

By the beginning of 1964 all the companies in the group except Moomba were insolvent. On 23rd March 1964 Kolotex was wound up. At about the same time negotiations began between Mr. Howie and an accountant, Mr. Ohlsson, for the sale of the companies in the group as "loss companies" for tax purposes. Before July 1965 Mr. Ohlsson had commenced discussions with Kolotex Holdings Limited, the holding company of another group of companies carrying on business as manufacturers of hosiery products, and these discussions came to final fruition when on 17th January 1967 an agreement was made for the sale of Kolotex as a "loss company" to P.I.O.C. Investments Pty. Limited ("P.I.O.C."), a company which Kolotex Holdings Limited had caused to be incorporated. In the meantime, a scheme of arrangement in respect of Kolotex, Levi & Hill, H. & J., Moomba and another company, Partition Industries (Overseas) Pty. Ltd., a subsidiary of Kolotex, had been approved by the creditors and the Supreme Court of New South Wales, and the winding-up order had been stayed.

It is unnecessary to go into details of the negotiations that preceded the making of the agreement. What was done in the course of those negotiations tends to show that one purpose of the agreement finally reached, and of any arrangements connected with it, was to enable Kolotex to take the losses incurred in previous years into account for the purposes of s. 80, but that in any case is clearly established. However, some matters that occurred during this period should be mentioned. On 23rd July 1965 a letter written by Mr. Ohlsson's solicitors to the solicitors of Kolotex Holdings Ltd. referred to the fact that an agreement had been reached, subject to contract, for the sale of sixty per cent of the shares in H. & J., Levi & Hill and Kolotex, and for the payment by Kolotex Holdings Ltd. of 3s.6d. in the pound of confirmed losses of Kolotex, and said: "Mr. Howie will retain the beneficial ownership of shares in Moomba Pty. Limited having 40 per cent of the voting and dividend rights and the right to receive 40 per cent of any distributions of capital." During 1965 Mr. Ohlsson and his wife became the principal shareholders in Andrew Holdings Pty. Ltd., one of the companies holding shares in Moomba. Some time in or before June 1966 Mr. Ohlsson persuaded six of the former shareholders in H. & J. to take transfers at a price of $1 per parcel, and in June 1966 the transfers were effected: Moomba transferred a parcel of 100 ordinary shares in H. & J. each to Messrs. Josephson, Stanton, Sharpe and Reid and Mrs. Stanton, and also transferred to Mrs. Maxwell 750 shares in H. & J. which as a result of special resolutions were converted into 250 "B" ordinary shares and 500 twelve and a half per cent preference shares. The object of all these transactions was to rearrange the beneficial ownership of shares in H. & J. so that the conditions stated in s. 80C would be satisfied in relation to the losses incurred in the years 1960 and 1961.

Moomba had some assets which Mr. Howie wished to retain and Kolotex Holdings Ltd. did not wish to acquire. These were sold to Peter Holdings Pty. Ltd. (another Howie family company) and by a series of transactions, including the circulation of cheques, the result was achieved that Peter Holdings Pty. Ltd. owed Mr. Howie $325,272, and that Mr. Howie owed the same amount to Moomba, thus placing him in a position in which it might have been possible to induce him, if necessary, to exercise his powers as governing director of Moomba in a manner consonant with the wishes of Kolotex Holdings Ltd., once that company had acquired (through its subsidiary) its contemplated shareholding in Moomba.

The details of the agreement of 17th January 1967 do not matter, but as a result of the agreement, and of the transfers executed pursuant to it, P.I.O.C. became the holder of forty-nine per cent of the issued shares in Kolotex, Levi & Hill and H. & J., and of sixty per cent of each of the various classes of issued shares in Moomba, except the governor's shares. Levi & Hill still held more than half of the shares in Kolotex, H. & J. more than half of the shares in Levi & Hill, and Moomba more than half of the shares in H. & J., and Mr. Howie still held one share in each of those companies, and the governor's shares in Moomba, but there was nothing in the agreement requiring the retention of any of those shares. Under the agreement the main benefit of the consideration was to go to Andrew Holdings Pty. Ltd., i.e. to Mr. Ohlsson, but by a separate agreement Mr. Howie was to be paid by one of Mr. Ohlsson's companies for taking part in the scheme.

Kolotex carried on business in the year ended 30th June 1967, and made the income shown in its return. After 30th June 1967, when no more could be done to ensure that the losses made in past years were deductible, P.I.O.C. acquired all the remaining shares in Moomba, and Mr. Howie's debt to Moomba was extinguished. P.I.O.C. also acquired the shares in H. & J. of the six former shareholders, each of whom was paid $25 for his or her parcel of shares.

It now becomes necessary to consider the action taken in the office of the Commissioner in making the assessment, in order to determine whether, as was submitted on behalf of Kolotex, the Commissioner should be held to have been satisfied as required by ss. 80A and 80C. The return submitted by Kolotex contained a schedule which bore the following heading: "Application under s. 80D of the Income Tax Act to have losses previously incurred by the company allowed as a deduction from assessable income for the year ended 30th June 1967." This heading was not in fact intended to be a request that s. 80D should apply; the reference to s. 80D had been inserted in error. In the relevant part of the schedule Kolotex contended that the provisions of ss. 80A and 80C were satisfied and did not refer to s. 80D. However, the investigation officers of the Commissioner thought that a request had been made for the application of s. 80D and in the circumstances they can hardly be blamed for taking this view. Those officers made a report on the assessment. An examination of the reasons expressed in the report shows that the investigators formed the following opinions:

(a) The application of s. 80D had the result that the provisions of s. 80A were not satisfied and that those of s. 80C were not applicable (because of the effect of s. 80C (4)).

(b) Section 80B (5) empowered the Commissioner to treat the shares beneficially held by Mr. Howie in Moomba during the year of income as not being held by him at the relevant time.

(c) If the application of s. 80C were not excluded by the application of s. 80D, its provisions were not satisfied in respect of the losses incurred in the year 1960; but would have operated so as to allow the losses made in years 1961 to 1966 to be deducted if it were not for the application of s. 80B (5). However, s. 80B (5), when applied, had the result that the provisions of s. 80C (1) (b) were not satisfied, and that the latter losses were not deductible.

(d) If s. 80D had not had the effect that s. 80A had not been satisfied, the application of s. 80B (5) would have the same effect in respect of the losses incurred from 1961 to 1966.

The investigators concluded by making the following recommendation, which is contained in par. 63 (a) of their report:

Deduction for previous years' losses as claimed in the 1967 return of the taxpayer company be disallowed. The requirements of s. 80C have not been satisfied. Alternatively if the heading in the schedule on folio 6 of the annexure to the 1967 return is taken as a request for the application of s. 80D, the provisions of s. 80A (after the operation of s. 80D) have not been satisfied.

The report of the investigation officers was considered by a supervisor who took substantially the same view of the matter and made a recommendation in the following terms:

I agree with the recommendations made in par. 63 of the Senior Investigation Officer's report but consider that in order to avoid limiting the defence of the assessment in the event of an appeal being lodged, the company should not be advised as to the particular sections of the Act under which the disallowance of the losses has been made. His report was in its turn considered by a more senior officer who indorsed it as follows: I support the proposals in par. 63 of Messrs. Clarke and Butler's report as well as the recommendation by S.I.B. that the company should not be advised, at this stage, of our technical reasons for disallowing the claim for the losses. The report thus indorsed came before Mr. T. Jackson, who at the time was First Assistant Deputy Commissioner of Taxation, but who has since died, for his decision. On this report Mr. Jackson wrote the words "Take this action" which, as an arrow which he marked on the report shows, were intended to refer to the recommendation made by the senior officer which I have last quoted. In other words, the action to be taken (apart from the regrettable decision to refrain from communicating the reasons for the disallowance) was that set out in "the proposals in par. 63". The only proposal in par. 63 was to disallow the deduction. Clearly, in my opinion, that is the only relevant action which Mr. Jackson directed be taken. It was in consequence of this direction that the assessment was made. The assessment itself reveals no more than that the claim to deduct losses made in previous years was not allowed.

The question whether the Commissioner was satisfied of the matters stated in ss. 80A and 80C is not necessarily to be answered by finding that some of his officers were satisfied of those matters. The satisfaction required is that of the Commissioner himself - although of course if a Deputy Commissioner is exercising delegated powers the satisfaction of the Deputy Commissioner would be enough - see s. 13 of the Act. It is, however, not enough that the Commissioner's officers are satisfied if the Commissioner does not adopt their views and make their satisfaction his own. In some cases a Commissioner may adopt the recommendation made to him by his subordinates without accepting all their reasoning. In the present case, however, it was disclosed before Mason J. upon what basis the assessment was made and it is clear that the Commissioner did accept the reasons which were put to Mr. Jackson and of which I have endeavoured to give a summary.

The first submission made on behalf of Kolotex was that it should be held that the Commissioner was satisfied of the matters stated in the two relevant sections. It was said that it appeared that the Commissioner reached the conclusion that if it had not been for the operation of ss. 80B (5) and 80D Kolotex would have been entitled to deduct the losses claimed, at least the losses sustained in the years 1961 to 1966. In other words, if the Commissioner had not thought - wrongly as it was submitted - that ss. 80B (5) and 80D had applied he would have reached the requisite satisfaction. It was then submitted that once it is held that the Commissioner was wrong in applying the provisions of ss. 80B (5) and 80D it can be concluded that he was satisfied of the matters stated in ss. 80A and 80C. Further, it was argued that in any event the Commissioner must have been satisfied as to the matters stated in s. 80C (1) (a) for it was only in relation to s. 80C (1) (b) that he said that he failed to reach satisfaction.

I find it impossible to accept these contentions. The conditions stated in ss. 80A and 80C are not fulfilled unless the Commissioner is actually satisfied. As Windeyer J. said in Federal Commissioner of Taxation v. Brian Hatch Timber Co. (Sales) Pty. Ltd. [7] : "Was the Commissioner duly satisfied in fact? That is the essential question; not was his dissatisfaction justified." Once the Commissioner is in fact satisfied he is bound to allow the deduction, although of course only to the extent allowed by the provisions of s. 80. If the Commissioner has in fact been satisfied he cannot subsequently refuse a deduction on the ground that he ought not to have been satisfied, unless in the circumstances he is entitled to amend the assessment under s. 170 of the Act. By the same reasoning, however, it cannot be said that if the Commissioner has not in fact been satisfied but ought to have been satisfied he is bound to allow the deduction, although such a case may be one in which the court on appeal will hold that the Commissioner's conclusion should be reviewed. Unless it is sought to review the conclusion of the Commissioner that he is not satisfied, it is not enough to say that he ought to have been satisfied, or that he would have been satisfied if he had not fallen into error. The court on appeal cannot purge the Commissioner's reasoning of its errors and then attribute to him a satisfaction which in fact he lacked. Moreover, when the Commissioner has been satisfied of the matters stated in s. 80C (1) (a) but has refused a deduction because he has not been satisfied of the matters stated in s. 80C (1) (b), he is not estopped thereafter from changing his mind and deciding that he is no longer satisfied of the former matters. Once the Commisssioner has been satisfied of all the matters mentioned in s. 80A or s. 80C, the condition of the section has been fulfilled and the obstacle which it raises to the allowance of a deduction has been overcome. However, if the Commissioner has failed to reach complete satisfaction as to all the requisite matters and his decision becomes open to review, he is not precluded from saying that he was wrong in expressing satisfaction as to some of the matters mentioned in the section.

In the present case the Commissioner was not in fact satisfied of the matters stated in either s. 80A or of those stated in s. 80C and the first contention made on behalf of Kolotex fails.

The questions that then arise are whether the conclusion of the Commissioner is open to review and, if so, whether it should be held that he should reach the requisite satisfaction. The grounds on which the conclusion by the Commissioner that he is not satisfied may be examined by a court of appeal are those stated in Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [8] ; see also Federal Commissioner of Taxation v. Brian Hatch Timber Co. (Sales) Pty. Ltd. [9] . A board of review may have wider powers - see per Owen J. inFederal Commissioner of Taxation v. Brian Hatch Timber Co. (Sales) Pty. Ltd. [10] . It seems that a court in deciding whether some ground has appeared to justify a review of the Commissioner's conclusion that he is not satisfied should consider the question on the basis of the material which was before the Commissioner even though further material is before the court - Federal Commissioner of Taxation v. Brian Hatch Timber Co. (Sales) Pty. Ltd. [11] . However, it would appear to me that once it is decided that the conclusion of the Commissioner should be disturbed, for example, on the ground that it was based on error, it is right for the court to reach its final conclusion as to whether or not the Commissioner ought to be satisfied by reference to all the material before the Court, because if the matter were referred back to the Commissioner to reconsider the question he would obviously be entitled and bound to consider all the information then available. Both parties in the present case put their submissions on the footing that once this Court decided that the Commissioner had been in error the appeal should be decided by reference to all the material before the Court.

1. (1949) 78 C.L.R., at p. 360. 2. (1972) 128 C.L.R. 28. 3. (1972) 128 C.L.R., at p. 59. 4. (1972) 128 C.L.R., at pp. 30-31, 57-58, 59.

There is no doubt that the decision of the Commissioner was affected by error. It is not contested that he was wrong in thinking that s. 80D applied. Mason J. further held that he was wrong in applying s. 80B (5). However, I do not need to consider the question whether the provisions of s. 80B (5), which are regrettably wide and vague, were applicable to the present circumstances. In my judgment, if the conclusion of the Commissioner is examined it will be found to have been correct. On the view that I take of the law and the facts, the Commissioner could not properly have been satisfied of the matters stated in ss. 80A and 80C, whether or not s. 80B (5) was applicable.

Before I turn to consider further the meaning of ss. 80A and 80C, and whether their conditions were satisfied in the present case, I must discuss the rights of Mr. Howie in relation to the various companies, and particularly his right to exercise voting power, for it is upon that question that the decision of the appeal ultimately turns. Before 7th February 1962 Mr. Howie's shares in Kolotex, Levi & Hill and H. & J. carried no special voting rights. After that date, art. 17 of the articles of each of those companies purported to give Mr. Howie when present at any general meeting of the company "the right to as many votes in the case of an ordinary resolution as shall constitute a majority of the votes given on such resolution and in the case of an extraordinary or special resolution as shall constitute a three-fourths majority ". Before us two arguments were advanced in relation to this article that had not been canvassed before Mason J. First it was put that on its proper construction the article did not give Mr. Howie the right to enough votes to carry an ordinary or special resolution as the case may be, but only the right to a majority or a three-fourths majority of the total number of votes cast by the other shareholders. For example, if the other shareholders cast ten votes on an ordinary resolution, Mr. Howie would have the right to six votes, which would not be enough to decide the issue if the ten votes were all cast in opposition to his. This is not in my opinion the correct construction of the article, and would defeat its obvious purpose of giving Mr. Howie the power to carry or defeat any resolution. The effect of the article, if valid, is that on a resolution all votes, other than those to which Mr. Howie is given a right, must be counted and Mr. Howie must then be given so many votes as will give him a majority of all the votes cast, including his own, if the resolution is an ordinary one, and a three-fourths majority of all the votes if it is extraordinary or special.

The second argument submitted on behalf of Kolotex was that art. 17 conferred a voting right on Mr. Howie only in his capacity as a shareholder of the company. I agree that if Mr. Howie had not been a shareholder, he would have had no right to vote. As at present advised I am very doubtful whether a company could by amendment of its articles confer upon a person who is not a member a right to vote. Such an article would seem to me to be at variance with the provisions of the Companies Act, 1961 N.S.W. (as amended). Section 144 of that Act plainly enough indicates that only a member may effectively vote on a special resolution. There is no similar express provision in relation to an ordinary resolution, but the whole tenor of the Act, so far as it deals with notice of and voting at meetings, strongly suggests that any general meeting of a company is a meeting of its members, at which people who are not members or their proxies have no right to attend and vote. Moreover, it might be thought that the general principle that the articles do not constitute a contract between the company and an outsider would be an obstacle in the way of a non-member who sought to enforce an article which purported to give him a right to vote, assuming it to be otherwise valid. However, it seems to have been accepted, by the authors of textbooks of high authority, that the articles of a company may validly confer on non-members, or at least on such as are debenture holders, the right of voting, although their votes could not be taken into account for the purposes of a special resolution: Palmer's Company Precedents, 17th ed. (1956) Pt. 1, p. 498; Gore-Browne, Handbook on Joint Stock Companies, 41st ed. (1952), p. 432; Gower, Modern Company Law, 3rd ed. (1969), p. 355. The question does not seem to have been the subject of discussion in any reported case, and it is not necessary for present purposes to express a concluded view upon it. In fact Mr. Howie was a shareholder in all three companies when the article was amended. The article gives him the right to vote "when present in person or by proxy or attorney at any general meeting", and he can exercise that right "on a show of hands and on a poll". All these words suggest that the right conferred is one exercisable by a member of the company. It is doubtful whether he could attend a meeting without being a shareholder, and even more doubtful whether he could appoint a proxy if he were not a member of the company - see s. 141 of the Companies Act, 1961 N.S.W. (as amended). The right of voting given by art. 17 is intended to be exercisable on a special resolution as well as on an ordinary resolution, but as I have already pointed out, s. 144 of the Companies Act has the effect that the votes of a non-member are not counted to make up the three-fourths majority necessary for the purposes of a special resolution. These circumstances are sufficient to show that art. 17 intended to confer the right to vote upon Mr. Howie in his capacity as a shareholder. But even if that had not been the case, the fact that he was a member was enough to make the article capable of valid operation. If it be assumed that the right to vote in a company may not validly be conferred upon a person who is not a member, it does not follow that the articles, to be valid, must reveal an intention to confer the right only on a member; on that assumption the right may be exercised if the person upon whom it is conferred is in fact a member but not otherwise.

The next step in the argument of Kolotex was that the right to vote given to Mr. Howie by art. 17 was attached to his share in each of the companies, so that each share carried the right to exercise the voting power which it conferred. Although, as I have just suggested, Mr. Howie would have ceased to be able to exercise the right to vote if he had ceased to be a shareholder, it is not correct to say that the right was attached to or carried by the shares. If his share in Kolotex had been transferred to another person, the transferee would not have acquired the right given by art. 17 - that right was personal to Mr. Howie, even if it could only have been exercised while he remained a member. Moreover, the possession of that very share was not essential to ensure that Mr. Howie had the right. If he had acquired another share, and sold the first, he would still have had the right to vote; if he had bought another share and had kept both shares it could not have been said that one share rather than another carried the right. The possession of a share may have been a condition of the exercise of the right, but the right itself was conferred by art. 17 in such a way that it was not attached to or carried by any share.

A further contention by Kolotex was that the voting right conferred by art. 17 did not reside in Mr. Howie, but in the beneficial owner of the shares registered in the name of Mr. Howie. This argument was in part founded on the proposition - which I have rejected - that the right to vote was carried by the shares, but it was also submitted that Mr. Howie could only vote if he exercised his right as a shareholder to attend a meeting of the company or to give a proxy, and that since he held his shares in trust he was subject to the control of the beneficial owner as to the manner in which he exercised that right. Although the evidence as to the nature of the trusts on which the shares were held was rather meagre, this argument would have required serious consideration had it not been for the fact that Mr. Howie held, beneficially, the governor's shares in Moomba. Notwithstanding the fact that his indebtedness to Moomba may have rendered him susceptible to pressure or persuasion, he had complete control of that company. Assuming that Levi & Hill, as the beneficial owner of the share held by Mr. Howie in Kolotex, could otherwise have controlled Mr. Howie in the exercise of the voting rights which Mr. Howie had in Kolotex, Levi & Hill itself was under the control of H. & J., and H. & J. under the control of Moomba, and Mr. Howie as governing director of Moomba could have ensured that none of the subsidiary companies did anything to interfere with the exercise of his powers under art. 17 of Kolotex. In the result, Mr. Howie had the power to control all four companies, and no doubt this is what had been intended when the articles were amended in 1962. There was therefore no one who could effectively prevent Mr. Howie from exercising the voting rights in Kolotex given to him by art. 17, or control him in the exercise of those rights.

Two questions of construction then arise. The first is what is the meaning of the words "the voting power in the company" which appear in s. 80A (1) (c) and s. 80C (1) (b) (i). On behalf of Kolotex it was submitted that these words refer only to the voting power of the members of the company, or (what is not the same thing) the voting power attached to shares. I have already expressed a doubt as to whether the voting power of a company could ever be found to reside outside its members, and am therefore disposed to agree that "the voting power in the company" is the voting power exercisable by members of the company, but that does not assist Kolotex, since Mr. Howie was a member of each company. However, I am unable to agree that the words are restricted in their meaning to voting power attached to or carried by shares. The words are quite general, and in their natural meaning would include all voting power that may be exercised in the company, however conferred. Indeed the change in language in the sections supports this view; first, reference is made to shares carrying rights, but then the sections go on to speak, not of the voting power carried by all of the shares in the company, but of the voting power in the company. It was suggested that the words "the voting power in the company" in ss. 80A and 80C were intended to bear a similar meaning to the words "a voting interest in a company" used in s. 80D, which, as the definition in s. 80D (5) shows, were intended to refer to a so-called interest possessed by the beneficial owner of shares carrying voting power. In my respectful opinion, the special definition, limited to the purposes of s. 80D, by which a particular meaning is given to the phrase "a voting interest in a company" in that section, throws no light on the meaning of the different words, "the voting power in the company", used in other sections. I conclude, therefore, that Mr. Howie, who had a right to vote at meetings of the company, and had that right because he was a member of the company, had a right to exercise a proportion of "the voting power of the company" within the meaning of those words in ss. 80A and 80C.

The second question of construction is raised by s. 80C: what is a "controlling interest" within the meaning of that section? It was not, I think, contested that the general words used by Kitto J. in Mendes v. Commissioner of Probate Duties (Vict.) [12] are applicable to s. 80C:

a company A, which by virtue of its voting power in a general meeting of company B controls that company, has a controlling interest in company C if company B holds the majority of votes in the general meeting of company C. It was therefore not in contest that during the year 1960 and for part of the year 1961 H. & J. was the holding company which had a controlling interest in Kolotex : by its voting power it controlled Levi & Hill which in turn controlled Kolotex and at that time Moomba had no controlling interest in H. & J. At some time during the year 1961 Moomba acquired complete control of H. & J. When it did so Mr. Howie, by virtue of his governor's shares, had complete control of Moomba, but since no other company had a controlling interest in Moomba, it was the holding company having a controlling interest in Kolotex within s. 80C. However, from 7th February 1962 Mr. Howie by reason of the rights which were given to him by art. 17 had the complete control of Kolotex. The argument submitted on behalf of Kolotex was that a "controlling interest" within s. 80C is confined to an interest that arises from a shareholding, and that in determining where the "controlling interest" in a company lies rights not attached to shares must be disregarded. Therefore it was said that once Moomba acquired its control of H. & J., Moomba and not Mr. Howie, had the controlling interest in Kolotex. In my judgment, it is not right to ignore the power of control which Mr. Howie possessed in Kolotex. I am in respectful agreement with the view of Viscount Simonds, expressed in Barclays Bank Ltd. v. Inland Revenue Commissioners [13] , and cited by Kitto J. inMendes v. Commissioner of Probate Duties (Vict.) [14] , that there is no difference between the natural meaning of the phrases "having a controlling interest in the company" and "having control of the company". 1. (1967) 122 C.L.R. 152, at p. 162. 2. [1961] A.C. 509, at p. 524. 3. (1967) 122 C.L.R., at p. 161.

The Commissioner could only properly be satisfied, in accordance with s. 80C (1) (a), in respect of the years 1960 and 1961, if H. & J., the holding company which had a controlling interest in Kolotex at some time during both of those years of loss, had a controlling interest in Kolotex at all times during the year of income. I agree that a company which was the holding company of a subsidiary company during a year of loss within s. 80C does not cease to be "the holding company" within s. 80C (1) (a) simply because during the year of income it has ceased to be true that no other company has a controlling interest in the holding company. The fact that during the year of income Moomba had a controlling interest in H. & J. did not in itself prevent H. & J. from still being the holding company of Kolotex within s. 80C (1) (a). However, H. & J. did not have a controlling interest in Kolotex during the year of income, because Mr. Howie then had the controlling interest in Kolotex by virtue of art. 17 of the articles of that company. For the same reason Moomba, which was the holding company having a controlling interest in Kolotex during part of 1961 and part of 1962, did not have a controlling interest in 1967. Therefore the Commissioner could not be satisfied of the matter stated in s. 80C (1) (a) in respect of the claim to deduct the losses incurred during 1960, 1961 and 1962, and the losses incurred in those years are not deductible. Further, in respect of the claim to deduct the losses incurred in 1960 and 1961, the Commissioner could not have been satisfied as to the matters stated in s. 80C (1) (b), because, in spite of the attempt to satisfy that paragraph by the reintroduction into H. & J. of the six former shareholders, it is not possible to say that at all times during the year of income shares in H. & J. carrying the right to exercise not less than two-fifths of the voting power of that company were beneficially owned by persons who at all times during the years of loss beneficially owned shares in the company carrying that right. From 7th February 1962 until after 30th June 1967 no one but Mr. Howie had two-fifths or more of the voting power in H. & J. If it were necessary, he could command three-quarters of the total voting power, which of course meant that the shares of the other shareholders between them did not carry the right to exercise more than one-quarter of the voting power.

Section 80C has no application to the years of loss from 1963 to 1966, because during those years no company had a controlling interest in Kolotex - the control lay in Mr. Howie. However, s. 80A applied, and the final question is whether the Commissioner could be satisfied as to the matters stated in s. 80A in respect of those years of loss. For reasons already indicated, in my opinion he could not. During the years 1963 to 1966 there were four shareholders in Kolotex - Levi & Hill, which beneficially owned 57,399 shares, Moomba and Mr. Stanton, each holding one share (whether beneficially or not does not matter in view of the size of the holding) and Mr. Howie, with one share. Although Mr. Howie held that share in trust for Levi & Hill, for reasons which I have already given the right to exercise the voting power was not carried by the share. Because of Mr. Howie's voting rights, it is not possible to say that any shares in Kolotex carried between them the right to exercise not less than two-fifths of the voting power; Mr. Howie had the right to exercise not less than two-fifths of the voting power, but that right, although conferred on him as a shareholder by art. 17, was not carried by his share. This was the situation in the years of loss 1963 to 1966, and also during the year of income. The Commissioner, properly directing himself, could not be satisfied that at all times during the year of income shares in Kolotex carrying between them the right to exercise not less than two-fifths of the voting power in Kolotex were beneficially owned by persons who at all times during the years 1963 to 1966 in which the loss was incurred beneficially owned shares in Kolotex carrying a right of that kind, because during those years of loss and during the year of income no shares carried a right of that kind. The condition stated in s. 80A is not fulfilled, and the deduction in respect of the losses sustained in the years 1963 to 1966 was rightly disallowed.

In these circumstances the Commissioner has no need to invoke the provisions of s. 80B (5), and it is unnecessary to consider the difficulties raised by that subsection, and by s. 80C (3) which purports to render s. 80B (5) applicable to the holding company and to interposed companies, but does not explain how s. 80B (5) (c) is to be sensibly applied to such a situation.

Some of the questions dealt with may be regarded as technical and unrewarding, but ss. 80A and 80C require them to be explored. For the reasons I have given, if, in accordance with the principles stated in Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [15] , the Commissioner's conclusion should be reviewed, upon a reconsideration of the matter the same conclusion must be reached, although for different reasons. The Commissioner was not satisfied, and could not properly be satisfied, of the matters stated in s. 80A in respect of the claim to deduct the losses incurred in the years 1963 to 1966, or of the matters stated in s. 80C in respect of the claim to deduct the losses incurred in the years 1960 to 1962. He therefore correctly refused to allow any deduction.

The Income Tax Assessment Act recognizes the right of a taxpayer to deduct from the assessable income of a year of income losses incurred in past years. Section 80 confers this right, subject to certain presently irrelevant limitations, and the appellant taxpayer sought to take advantage of it in respect of the 1967 year of income. During the seven years from 1960 to 1966 inclusive it had sustained losses of more than $500,000 and these it sought to have deducted from its assessable income for 1967, a year in which its income somewhat exceeded its accumulated losses for the preceding seven years.

However the taxpayer is both a company and one which was at all times a subsidiary of another company. The Act has, in the sections which follow s. 80, imposed special limitations upon the right of companies to obtain deductions in respect of their past losses and where a company is one in which a controlling interest is held by another company still further requirements must be satisfied before past losses are deductible.

The Commissioner disallowed as a deduction the whole of the losses sustained by the taxpayer in the years 1960 to 1966 and consequently assessed it to tax on a taxable income in excess of $500,000. It is from the order of Mason J. dismissing the taxpayer's appeal against the Commissioner's rejection of its objection to this assessment that the present appeal is brought.

In imposing special limitations upon the right of companies, and particularly controlled companies, to claim deductions for past losses the legislature saw fit to make entitlement depend upon the Commissioner being satisfied as to the existence of certain states of fact and in the present case the Commissioner's disallowance of the claimed deductions was due to his not being so satisfied.

Mason J. has found, in my view correctly, that the course of reasoning which the Commissioner followed in reaching his conclusion that he was not satisfied involved errors of law. Had the Commissioner not been misled by those errors it would seem from the evidence that, on his then understanding of the facts and of the law, he would have concluded that he was satisfied of the existence of those states of fact which the Act calls for if a taxpayer company is to be entitled to deduct its losses of past years. However, as I have said, because of the errors which the Commissioner made, he in fact never reached this requisite state of satisfaction of mind.

Such a situation would present no difficulty to a court were there no more to it than this; the court would be free to correct the errors of the Commissioner and if it then appeared that, but for those errors, the Commissioner should have been satisfied of the matters contemplated by the legislation then the court would allow the taxpayer's appeal and remit the assessment to the Commissioner so that effect might be given to the taxpayer's right to a deduction for past losses. It would no doubt be aided in reviewing the Commissioner's state of mind by the knowledge, in a case such as the present, that but for those errors the Commissioner would himself have attained the state of satisfaction of mind called for by the Act.

In the present case, however, a further factor has intervened. After issue of the assessment and before the hearing of the appeal before Mason J., the Commissioner, while still maintaining the propriety of his original course of reasoning, discovered, as he thought, quite different grounds upon which might be justified his failure to be satisfied as contemplated by the Act.

No doubt, attainment by the Commissioner of a state of satisfaction or his failure to attain that state of mind must, if it is to have any statutory significance, occur before notice of assessment issues to the taxpayer; I would regard as irrelevant to the correctness of the original assessment any state of mind existing after that time. But the present is, in any event, not such a case. Both before and after issue of the notice of assessment the Commissioner has remained unsatisfied. All that has happened is that he has discovered, as time has passed, what he regards as additional and alternative grounds for his failure to be satisfied and the significance of these new grounds is only this: before the court may review the Commissioner's failure to be satisfied it must detect some error of law affecting that conclusion or some other of the grounds for interference referred to by Dixon J. in Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [16] . Here such grounds exist, they are provided by the errors affecting the Commissioner's course of reasoning which led him to his conclusion. But having entered upon a review of the Commissioner's conclusion the court must form its own opinion of what should have been the Commissioner's conclusion and must do so unaffected not only by those errors which led the Commissioner to his original conclusion unfavourable to the taxpayer but also unaffected by any other errors or oversights, whether or not favourable to the taxpayer, which may have affected the Commissioner's original conclusion. The court will therefore necessarily have to consider any new grounds urged by the Commissioner as justifying the assessment, not because they may support the Commissioner's already vitiated state of dissatisfaction of mind, but rather because they may assist the court in determining whether either a contrary conclusion should be substituted for the Commissioner's original failure to be satisfied, founded as it was upon reviewable error, the appeal therefore being allowed, or whether, on the contrary, the assessment should stand unaffected and the appeal be dismissed because, once all errors and oversights are rectified, the case is not seen to be one in which the Commissioner should have been satisfied in terms of the Act.

It is in the light of the foregoing that I approach the present appeal. Its particular facts appear in the reasons for judgment of Mason J.; the relevant sections of the Act, to the extent to which their terms require statement, will also be found there. The Commissioner had failed to be satisfied in terms of s. 80C of the Act in respect of each of the seven loss years in issue. In the case of the first year, 1960, this was, his Honour found, because the Commissioner thought that the company which had a controlling interest in the taxpayer in that year did not have such an interest in it in 1967, the year of income, and therefore a prerequisite to satisfaction under s. 80C was absent. In the case of the remaining six years, 1961 to 1966, it was because the Commissioner considered himself entitled to invoke his powers under s. 80B (5) in relation to the ownership by a Mr. Howie of his shares in a company which, during those years and also during the year of income, was the taxpayer's holding company, thereby producing what may be described as a deemed situation, in which the facts prerequisite to satisfaction under s. 80C were absent.

His Honour concluded, for reasons with which I am in full agreement and which I would adopt as my own, that in each case the Commissioner was in error. In the case of the loss sustained in the 1960 year the company which in 1960 had a controlling interest in the taxpayer did not, as the Commissioner thought, cease to be a holding company having such an interest in the taxpayer when, by 1967, the year of income, it had itself become "controlled"; it is enough that it still had, in 1967, a controlling interest in the taxpayer, this is all that s. 80C (1) calls for so far as the year of income is concerned; it does not require that in that year the "holding company" should be one in which no other company has a controlling interest.

In the case of the losses incurred in the six subsequent years the Commissioner was not, in my view, entitled to invoke s. 80B (5) in respect of those years. Mason J. concluded, after a careful examination of the facts, that there was no proper basis upon which it could be said that the shares in Moomba Pty. Ltd. owned by Mr. Howie were the subject of any contract, agreement or arrangement falling within pars. (b) and (c) of s. 80B (5). Having heard argument at length on this aspect I am of the view that his Honour was correct in that conclusion and this for the reasons stated by him; it follows that the deeming power conferred upon the Commissioner by s. 80B (5) never became exercisable.

I disregard the role which s. 80D may have played in the Commissioner's disallowance of the deductions claimed by the taxpayer; to the extent that the assessment was influenced by the Commissioner's reliance upon s. 80D this would involve a further error on his part, induced in part by the taxpayer's own mistake. Disregarding as I do this aspect, it nevertheless sufficiently appears that the other errors to which I have referred necessarily vitiate the Commissioner's failure to be satisfied in terms of s. 80C; but it does not follow that, these errors apart, he ought to have been satisfied in terms of s. 80C.

It seems, from the material that was in evidence before Mason J., that, but for the consequences of these two errors upon their approach to the task of assessment and ignoring for present purposes their concern with s. 80D, the two senior investigation officers upon whose report the Commissioner must be taken to have acted would have concluded that the taxpayer satisfied the requirements of s. 80A and s. 80C. I would regard it as a proper inference from the evidence that the Commissioner's course of reasoning leading to his making of the assessment followed that of his two officers and that he shared with them the view that, but for what I have described as their two errors, the taxpayer would be entitled to deduct the losses incurred in the preceding seven years. One cannot, however, fix upon this particular stage in the course of reasoning leading to the assessment and, by disregarding the ultimate failure to be satisfied because it was vitiated by error, elevate this belief on the Commissioner's part into the statutory satisfaction which s. 80A and s. 80C call for. That the Commissioner in fact reached a contrary view, and failed to be so satisfied, is an inference called for by the evidence and the question must then be, not "Would he but for the errors he made, and otherwise on his then understanding of the facts and law, have been satisfied?" but rather, "Should he, on what the court regards as the proper view of the facts and the law, have been satisfied?".

It is with the discharge by the Commissioner "of his exact function according to law" that the court is concerned - per Dixon J. in the Avon Downs Case [17] , and see Federal Commissioner of Taxation v. Brian Hatch Timber Co. (Sales) Pty. Ltd., per Walsh J. [18] , per Menzies J. [19] and per Owen J. [20] . Consideration is, in the first instance, to be confined to material which was before the Commissioner when he made his assessment, as is made plain by the judgments in this latter case; but once it is established that the Commissioner has, in this case through error of law, failed properly to perform his statutory function the court will then determine what state of mind concerning the matters in s. 80A (1) and s. 80C (1) will amount to a discharge of that function and will do so having regard to the facts then before it, viewed in the light of what the court regards as the true effect of the legislation.

1. (1949) 78 C.L.R., at p. 360. 2. (1972) 128 C.L.R., at p. 30. 3. (1972) 128 C.L.R., at p. 51. 4. (1972) 128 C.L.R., at p. 61.

Mason J. undertook such an investigation and concluded that, upon grounds different from those upon which the Commissioner in fact acted, he should not have been satisfied in terms of the legislation. He accordingly dismissed the appeal. In the case of the loss years 1960 and 1961, he held that H. & J. (Holdings) Pty. Ltd., which, for the purposes of s. 80C (1), was the holding company of the taxpayer for the whole of the 1960 year and for part of the 1961 year, had, contrary to the requirements of s. 80C (1), no controlling interest in the taxpayer during the income year 1967. For the loss year of 1962 his Honour arrived at a similar result, in that case the relevant holding company being Moomba Pty. Ltd. These conclusions bear a misleading similarity to that of the Commissioner in disallowing any deduction for the losses of the 1960 year but in fact are based upon quite different reasoning, reasoning which also led his Honour to conclude that the situation affecting the losses for the four subsequent years, 1963 to 1966, was also one which did not meet statutory requirements, in this case those of s. 80A (1). There was only one shareholder of the taxpayer during 1967, the income year, which had also been a beneficial owner of shares in those four loss years; this was Levi & Hill Pty. Ltd. and the shares it held did not then carry the right to exercise not less than two-fifths of the voting power in the taxpayer; hence the requirements of s. 80A (1) could not be regarded as complied with.

Fundamental to these conclusions was the view, urged on behalf of the Commissioner and adopted by Mason J., that the effect of certain of the articles of associaion of the taxpayer was to confer upon Mr. Howie, its governing director, powers so far reaching as to preclude any other party from having a controlling interest in the taxpayer during the income year, 1967. This was enough to defeat the claim to a deduction for the losses of 1960, 1961 and 1962, having regard to s. 80C (1). The voting power thus conferred upon Mr. Howie by the articles of association of the taxpayer also operated to defeat the claim to deduct the losses of the four subsequent years since, having regard to s. 80A (1), it could not be said that during 1967 the shares held by Levi & Hill Pty. Ltd. in the taxpayer carried the right to exercise not less than two-fifths of the voting power in the taxpayer company.

It was this contention, turning upon the meaning and effect of the taxpayer's articles of association, that the Commissioner for the first time espoused some time after issue of the assessment and which he later put forward on the appeal before Mason J. as an alternative ground for the Commissioner's failure to be satisfied in terms of s. 80A and s. 80C.

In my view the taxpayer's articles of association and, indeed, those articles in identical terms appearing in the articles of association of Moomba Pty. Ltd., H. & J. (Holdings) Pty. Ltd. and Levi & Hill Pty. Ltd. do bear the meaning attributed to them by the Commissioner and do produce the consequences for which he contends. I share with Mason J., and for the reasons which he states, the view both that "voting power in the company" appearing in s. 80A (1) means the entire voting power, all exercisable voting power, and not merely such voting power as is associated with the holding of particular shares, and that controlling interest in s. 80C (1) is not confined to that form of control which stems from rights attached to shares but extends to powers of control not derived from such rights.

For the taxpayer it was submitted on this appeal that even if, contrary to the taxpayer's contentions, Mason J.'s construction of these phrases were correct it did not follow that the powers conferred by the articles of association upon Mr. Howie affected either the status of Moomba Pty. Ltd. and of H. & J. (Holdings) Pty. Ltd. as having a controlling interest in the taxpayer in 1967 or the right of Levi & Hill Pty. Ltd. to exercise in that year not less than two-fifths of the voting power in the taxpayer.

This submission I reject; in my view the relevant article, art. 17, confers upon Mr. Howie, in addition to whatever votes he may be entitled to by reason of shareholding, such additional votes as on any particular occasion may be required so as to make the total votes he may cast sufficient in number to constitute by themselves a simple majority, or, in the case of a special resolution, a three-fourths majority, of all votes cast not only by others, whether for or against the motion in question, but also by him both pursuant to his right as a shareholder and pursuant to his special right under this article. Moreover the article does not, in my view, attach his special voting rights to any particular shares but confers them upon him so long as he holds the office of governing director (although not, I think, after he ceases to hold that office, in that event later articles come into effect the terms of which appear to me to be inconsistent with Mr. Howie thereafter retaining the special powers conferred by arts. 16 to 24). I would doubt his ability either to attend a meeting of members or to exercise any voting powers whatever under art. 17 were he at any time not a shareholder, but so long as he is both a shareholder and governing director, as he was at all times during 1967, the year of income, he has full exercise of those powers. Although he held his shares in all companies other than Moomba Pty. Ltd. in trust for other companies, I consider that the special voting power conferred on him by art. 17 would not, as distinct from any vote he might have as the holder of a particular share, be subject to any such trust. The evidence concerning such trusts, slight as it is, suggests that, as might be expected, they related to shares and to the rights thereby conferred and not to rights conferred by the articles independently of shareholding, even although exercise of such latter rights might be frustrated were Mr. Howie at any time not also a shareholder.

The consequence is, in my view, that the existence, in 1967, of the special voting powers possessed by Mr. Howie operated to prevent either H. & J. (Holdings) Pty. Ltd. or Moomba Pty. Ltd. from having any controlling interest in the taxpayer during that year. The existence of those powers also operated to make it impossible to say of Levi & Hill Pty. Ltd. that at all times during that year its shares in the taxpayer, which during the latter part of the year of income amounted to only slightly more than one half of its issued capital, carried the right to exercise not less than two-fifths of the voting power in the taxpayer. It follows that in the outcome the Commissioner's failure to be satisfied in terms of s. 80A and s. 80C was correct and the assessment was not excessive.

[The Right Honourable Mr. Justice Menzies died before judgment was delivered in this case.]