Coburg Investment Co Pty Ltd v Commissioner of Taxation

[1960] HCA 90

HIGH COURT OF AUSTRALIA

Windeyer J.

COBURG INVESTMENT CO. PTY. LTD. v. COMMISSIONER OF TAXATION

(1960) 104 CLR 650

9 December 1960

Income Tax (Cth)

Income Tax (Cth)—Assessable income—Profit accruing to taxpayer from compensation for compulsory acquisition of land—Resumption—Profit arising from sale of property acquired by taxpayer for purpose of profit-making by sale—"Sale"—Income Tax and Social Services Contribution Assessment Act 1936-1953, s. 26 (a) (Cth)—Lands Compensation Act 1928 (Vict.)—Slum Reclamation and Housing Act 1938 (Vict.).

Decision

December 9.
WINDEYER J. delivered the following written judgment:-
This is an appeal by Coburg Investment Company Proprietary Limited, a taxpayer, against amended income tax assessments in respect of the years of income ended on 30th June 1950, 1953 and 1954. Two objections are made in respect of each of the first two years: one to the assessment of the taxpayer's liability for income tax and social services contribution; the other in respect of additional tax assessed under Div. 7 of the Act. In respect of the year 1954 the objection is only to the income tax and social services contribution. The main question is whether a profit that the taxpayer company made when an area of approximately eighty acres of land at North Coburg, of which it was the owner, was resumed by the Housing Commission of Victoria formed part of the company's assessable income. This land was part of an area of about one hundred and thirty-five acres that the company had acquired in 1939. The basic question of fact is for what purpose was it then acquired. The Commissioner's contention is that the profit, which arose from the receipt of money as compensation on resumption, was caught by s. 26 of the Income Tax and Social Services Contribution Assessment Act as being a profit arising from the sale by the taxpayer of property acquired by it for the purpose of profit-making by sale or from the carrying out of a profit-making scheme. For the taxpayer two main contentions were made. First, it was said that the land had not been acquired for the purpose of profit-making by sale; and secondly, that the compulsory acquisition was not a sale within the meaning of the section. There is also a subsidiary question concerning a sum received by way of interest on the moneys payable upon resumption. (at p653)

2. The Coburg Investment Company was formed on 9th April, 1926, the signatories to the memoradum of association being Edward Samuel Taylor described as an investor and John Taylor described as a timber merchant. The objects of the company as set out in the memorandum are to carry out in Victoria or elsewhere all or any of a great number of activities. This catalogue of objects follows common form in its comprehensiveness and variety; yet it nevertheless contains some indications in its earlier paragraphs of the kind of business that it was contemplated the company would carry on. The first object is expressed: "The business of dealers in land and real estate and to acquire by purchase lease exchange or otherwise land buildings and hereditaments of any tenure or description and any estate or interest therein and any rights over or connected with land and turn the same to account as may seem expedient and in particular by procuring surveys to be made in respect of and subdividing any lands and lodging Plans of Sub-division in respect thereof, preparing building sites, and by constructing re-constructing altering improving decorating furnishing and maintaining offices, flats, houses, factories, warehouses, shops, buildings, works and conveniences of all kinds and by consolidating or connecting or subdividing properties and by leasing or disposing of the same". (at p653)

3. The next object is "the business of house, land, estate, general commission and financial agents, and to manage lands buildings and other property whether belonging to the Company or not and to collect rents and income . . . ". The immediately following objects are all suggestive of building activities or of the sale of building materials in one form or another. One may be quoted: "The business of Timber Merchants, Saw-Mill Proprietors and Timber Growers and/or Timber Getters, and to buy, sell, grow, prepare for market, import, export, trade and deal in Timber and Wood of all kinds and to manufacture and deal in articles of all kinds in the manufacture of which Timber or Wood is used and to buy clear, plant and work timber estates or plantations and to establish saw-mills and plant and apparatus necessary for the carrying on of the same". (at p654)

4. The taxpayer company was one of several associated companies controlled by Edward Samuel Taylor. He is its Chairman and Managing Director. He is also Chairman of Directors and Managing Director of Moreland Timber Company. This company was in existence before the taxpayer company. E. S. Taylor has had some connexion with the timber trade since about 1913, his father having been in the timber business. But E. S. Taylor did not become actively concerned in the Moreland Timber Company until after the death of his brother John Taylor in 1932 or thereabouts. He then took over the assets and activities of the Moreland Timber Company from his brother's estate. The Moreland Timber Company is a timber merchant. Its business premises were at Moreland. It had there a timber yard and a sawmill for cutting timber brought there in baulks and flitches. E. S. Taylor gave evidence. He says that he is an investor, investing in "anything that comes along". He appears to have been in complete control of the taxpayer company since it began. One Kirkwood, who is a director of the company also gave evidence. He agreed that the directors left it entirely to Taylor to run the business. He himself was a salesman employed by the Moreland Timber Company and had little knowledge of the affairs of the taxpayer company. (at p654)

5. The resumed land formed part of what was known as the Golf Links Estate, a hundred and thirty-five acres in all, at North Coburg. The Golf Links Estate was purchased by the taxpayer company from the Union Trustee Company of Australia Ltd. for 6,750 pounds by a contract dated 24th August 1939. Edgar's Creek runs through the land. The portion east of the creek, that is the higher land, and also some part of that on the west had been earlier subdivided into some five hundred building allotments. Of these a few, about thirty I think, had been sold: and therefore, were not included in the sale to the taxpayer except that the taxpayer expressly took over the benefit of four uncompleted contracts. The low-lying land adjacent to the creek which had at one time been a golf links was not subdivided. What justification there might have been in 1939 for hoping or expecting that land in this area might be developed for residential purposes it is really impossible to say. The previous owner had apparently hoped for this when he subdivided the land. But no houses had been built. When the taxpayer bought the property it was used as a dairy farm and the only building was a farm dwelling. When the Housing Commission first became interested in acquiring land in that part of Coburg was not proved. According to an officer of the Coburg Council who gave evidence the Housing Commission during the war began to erect houses on other land to the east of the Golf Links Estate. Speaking generally, there had been no residential development in the vicinity before 1939. But I am not prepared to infer that in 1939 the area would have no attractions for a speculative land buyer. (at p655)

6. The taxpayer's case is that it acquired the land for the purpose of using it for the timber business of the Moreland Timber Company: that that business was expanding greatly because an associated company controlled by Taylor had started an enterprise of felling and bringing in quantities of burnt timber from the forest areas after the 1939 bushfires: and that it was the intention to move from the Moreland premises to Coburg, and also to set up there a larger undertaking in conjunction with the logging enterprise. There was also mention of a somewhat shadowy plan for housing employees in the vicinity of the contemplated works. All this, it was said, was frustrated by the outbreak of war: and before the plan could be gone on with, the Housing Commission resumed the eighty acres. Taylor gave evidence that what he had in mind when he bought the land was this project of transferring there the undertaking of the Timber Company. He bought it in his own name. He signed the contract. He decided that it should become the property of the taxpayer company and the directors accepted this decision. There was evidence that the suitability of the land for a timber yard and the advisability of moving the Moreland Company was discussed between him and the other directors. The possibility of using a part of the land - the unsubdivided portion west of Edgar's Creek in particular - in conjunction with the timber business may have been considered at some early stage: but this would not mean that that was the purpose of the acquisition of the whole area nor indeed that it was the dominant purpose of the acquisition of any part of the land. For several reasons Taylor's evidence in the box of the purpose he had in mind - and the company seems to have had no mind apart from his - must be carefully scrutinized, tested and received with caution (cf. Pascoe v. Commissioner of Taxation (1956) 30 ALJ 402 ). Some material which one would expect to exist and to be helpful in testing the evidence does not exist. There are no director's minutes to throw light upon the transaction. It is said no minute book was kept and no formal meetings of directors were held. And the company apparently had no books of account such as might have given some indication of what its activities were in 1939. The position in regard to the books is extraordinary, but I draw no conclusion from it except that the company was conducted in such a way that I find it peculiarly necessary to weigh carefully statements about its past purposes and intentions. The accountants who for many years prepared the company's income tax returns certified on the 1952 return that full accounts were kept and that they had satisfied themselves by examination that the books of account were correct. Yet in June 1954, after the Commissioner had begun an investigation of the company's affairs they wrote to the Commissioner explaining that the company "did not have extant a full set of books", and stating that they had, at the suggestion of an officer of the Taxation Department conducting the investigation, written up a set of books as from 1st July 1945 and compiled amended income tax returns from them for the years 1946 to 1953. It is on these amended returns that the assessments now disputed were made. It is enough to say that they show extraordinary divergences from the returns for the same years that had previously been submitted. And I am left with the impression that probably little reliance can be placed upon the returns for the years earlier than 1945. These returns going back to 1927 were produced by the Commissioner, and those which had been signed by Taylor were used in his cross-examination. They may, of course, be no more accurate than those that were first submitted after 1945. But they are the only contemporaneous documents of the company that were produced that throw any light on its activities in and before 1939. Taylor in his evidence-in-chief said of the business of the company that "it was building up assets for the individuals concerned in the company". Everything, he said, was to be retained and that, as far as he knew, the company had not before 1944 disposed of any land at all. It transpired however in cross-examination, when the early income tax returns signed by him were produced, that in its early days the company was engaged in buying land, building houses on it and selling them on terms. Taylor explained that he had thought these activities, which were a long time ago, had been those of one of his other companies not of the taxpayer company. The returns show that the taxpayer company was collecting instalments on land sold to purchasers on terms up till 1940 : but no sales of land are shown as occurring after 1928. The Golf Links Estate appears as an asset in the balance sheet after 1939 : and until the purchase was completed the interest payable on the unpaid balance of purchase money appears as an outgoing. It was urged for the taxpayer that statements in the income tax returns signed by Taylor and the discrepancies between the various returns were not matters from which any positive conclusion could be drawn. It was said that they were merely matters that went to Taylor's credit. But that does not correctly state the position. The documents signed by Taylor were not put forward merely as statements by him that were inconsistent with his testimony but as statements by the company showing what was the nature of its activities - from that it was suggested that an inference could be drawn of its purpose in acquiring the Golf Links Estate. Taken with Taylor's admissions the documents are evidence of what the activities of the company were before 1939. But it was said they also show that by that time it had become merely a land holding company : that it owned other land on which the Moreland Timber Company carried on business. There would be force in this if the evidence stood there ; but it does not. (at p657)

7. On 14th March 1944 the Housing Commission took the first step towards resuming part of the land - that part being about eighty acres on the east side of the creek. It gave a notice to treat which purported to be in pursuance of the Slum Reclamation and Housing Act 1938 (Vict.) and the Lands Compensation Act 1928 (Vict.). It is suggested that for various technical reasons this notice might have been invalid. What is significant, however, is the response that it evoked. The company consulted its solicitors Messrs. A. L. C. Flint and Marrie. They wrote to the Housing Commission on 22nd March 1944 asking for an extension of the time to lodge a claim. Then on 16th August 1944 they sent a letter to the Housing Commission in the following terms :-

"We are submitting the Company's Claim herein, amounting to 38,612 pounds 10s. 0d., and of which kindly acknowledge receipt in due course. It is desired to particularly stress the fact that the Company, in forwarding its claim, simply submits to the inevitable. Definitely, the Company is not now, nor ever has been a seller in respect of the land. The purchase by the Company was made with only one end in view - the erection of dwelling houses by the Company on the whole of the Estate, and their sale to home purchasers on terms. The Company is closely identified with the Moreland Timber Co. Pty. Ltd., which has extensive wholesale and retail timber trade resources, and a complete organization for

building operations on a large scale ; also with Kemp &Sheehan

Pty. Ltd., wholesale Hardware and Plumbers' requisites suppliers. Through these several Companies the Estate could have been successfully developed, and it is probable a profit of 50,000 pounds 0s. 0d. would have accrued from the building scheme, exclusive of the profit reasonably to be expected to have been able to be passed on in assessing the land values of the different Lots in respect of the sale prices of the houses to be erected thereon. The whole plan showed such prospects of profit, with the added advantages of ready-to-hand investment of the same, as well as extensive business transactions for the several Companies associated with Coburg Investment Co. Pty. Ltd., that it may almost be said that no price would have tempted our Client Company to sell, certainly none which any other organization could have afforded to pay. We realize of course that all this goes by the board in view of the action of your Commission. Our main purpose in referring to it is to stress the fact that this is no sale, but a resumption under compulsion. Yours faithfully,

A. L. C. FLINT &MARRIE,

per J. E. AITKEN." (at p658)

8. The formal document called "Schedule of Claim" that particularized the claim for 38,612 pounds 10s. 0d. is as follows : - "(a) 365 Lots X 100 pounds average

(all subdivided) . . . . 36,500 pounds 0 0

(b) 10 3/4 acres of land not subdivided

into allotments X 150 pounds per acre 1,612 10 0 (c) Estimated cost of removal of farm

dwelling and outbuildings from subject land and

re-establishment of farm on adjacent

land . . . . . . . . 500 0 0" (at p658)

9. The "Schedule of Claim", dated the same day as the letter, is signed by Taylor. The letter was signed by a Miss Aitken a clerk in the solicitors' office. She was not called as a witness : but it is not suggested she composed the letter. That, it is suggested, was the work of Mr. Flint, a partner in the firm, who is now dead. The existence of this letter was known to Taylor before the present proceedings commenced. He said in evidence that he did not know how it came to be written, but that the negotiations were left to Mr. Flint and that he had full authority to act in the matter as he thought fit: that what the letter states was contrary to the fact: that no instructions had been given for any such statements to be made: and that the letter was written without the company's authority. But the taxpayer cannot dispose of this invonvenient document by simply disavowing it. Mr. Flint was the solicitor for the company. He had authority to speak on its behalf. He was well acquainted with its affairs: indeed, he and Mr. Taylor had business associations apart from the relationship of solicitor and client. We do not know what, if he had been alive, he would have said about the suggestion that this letter was an exercise of his imaginative talents regardless of the truth. He wrote the letter on the company's behalf and in the course of his employment as its solicitor. It is evidence against the company. Of course the taxpayer by seeking money from the Housing Commission on grounds that it says were untrue is not to be prevented from contending that, in truth, it does not owe money to the Income Tax Commissioner. But when the company by its managing director asserts in 1960 that its purpose in buying this land in 1939 was so very different from what in 1944 its solicitor had stated it was serious doubts are necessarily created. The manner in which the appellant's witnesses gave their evidence did nothing to dispel those doubts. I should add that an officer of the Taxation Department named Kennedy gave evidence. He had conducted an investigation into the taxpayer's affairs. It seems that at a conference at which he was present and at which legal representatives of the taxpayer were present there was some reference to the letter. The evidence was not explicit. It did not show, what I had understood it was expected it would show, that someone on behalf of the taxpayer had admitted the statements in the letter to be correct. It seems that what was mainly discussed was a submission on legal grounds that the compulsory acquisition by the Housing Commission was not a sale by the taxpayer within the meaning of s.26. It may be that, as the correctness of the statements in the letter were irrelevant to this contention, they were conceded for the purposes of the argument. But that, I think, was all and I base no conclusion on the evidence of Kennedy as to what occurred at the conference. (at p660)

10. Some time after the Housing Commission had given notice of its intention to acquire the eighty acres the taxpayer began to sell off parts of what remained. But that, the appellant urged, threw no light on what had been in mind in 1939. That I think is so. And I do not think that another event, which also occurred after the Housing Commission had taken the eighty acres, an event on which the appellant set some store, really has the significance it was sought to attribute to it. On 22nd November 1945 the Moreland Timber Company wrote to the Coburg City Countil requesting that part of the land that had not been resumed should be proclaimed a factory area. The material parts of the letter read: - "As this Company desires to erect a Sawmilling Plant and

Drying Kilns on the portion of Section 24 marked by a red
line on the attached plan, we hereby request your Council to have the land in question proclaimed a factory area. This Plant is to be installed in an effort to assist in supplying the seasoned timbers that are so urgently needed for building construction, and as we are anxious to push on with the work, we would appreciate an early reply to our application". (at p660)

11. This application was, at first, approved by the Council but the approval was withdrawn. It was renewed in January 1948 and again refused. The extent of the area that it was suggested should be proclaimed as a factory site was not established. It was suggested, however, that it was about forty acres: and it appears from the plan that this may be so, although it is not clear whether the whole area shown on the plan, and in respect of which the proclamation was sought, was owned by the taxpayer company. However, it is clear enough that permission was sought for the use for a timber business of a part of the unsubdivided residue of the taxpayer's land west of Edgar's Creek. But this 1945 proposal was, in character and in circumstance, very different from what it is said was in 1939 the motivating purpose for the acquisition of an area a hundred and thirty-five acres much of it consisting of building allotments in an existing subdivision. It is significant too that, as some of the lots in the subdivision, situated here and there, had already been sold, the land that the taxpayer acquired was not one continuous area with an outer boundary: it had patches in it belonging to other people. (at p660)

12. In short I am not satisfied - and the onus is on the appellant - that the purpose for which the land was bought in 1939 was to use it as a capital asset for the conduct of a timber business. On the contrary the dominant purpose was, I think, to sell it, or most of it, in due course. Along with this main purpose there may have been some idea at some stage of using parts not suitable for building lots in connection with the timber business. The circumstances all point, I think, to the statements in the letter of 16th August 1944 being substantially correct. That during the war years there were no sales of lots - or only one sale - seems of little significance when one remembers the conditions of the time and the existence of land sales control. (at p661)

13. I turn to the second submission made for the appellant, namely that there was no "profit arising from the sale by the taxpayer of any property" within the meaning of s. 26. The acquisition of the land by the Housing Commission was not, it was contended, the result of a sale by the taxpayer. I do not think it necessary that I set out the negotiations that went on between the taxpayer and the Commission from the time when the first notice to treat was given on 14th March 1944. This was found to contain a misdescription of the land to be taken and fresh notices were afterwards given but the parties were in fact negotiating as to a proper price for some years. At one stage it appeared that the matter would have to be settled by arbitration pursuant to the Lands Compensation Act 1928 and the Slum Reclamation and Housing Act 1938. However, the taxpayer did not in the end insist on arbitration. On 30th November 1948 the Crown Solicitor of Victoria wrote to Messrs. A. L. C. Flint &Marrie in the following terms:-

"Further to the conversation of 23rd November between your Mr. Flint and Mr. Richards of this office, I am now authorised by the Commission to offer to your client in full settlement and satisfaction of all claims under the notice to treat herein the sum of 23,500 pounds 0s. 0d. together with interest at the rate of 3 1/4% from 31st March 1944 to 30th November, 1948. It is agreed that payment of the said sums will be made on 1st July 1949 in accordance with Mr. Flint's suggestion in that behalf. I would be pleased to have your written confirmation of the above arrangement." (at p661)

14. The reply on 2nd December acknowledged receipt of this letter and said: "we hereby accept the offer therein set out". The matter was settled by the payment of 27,065 pounds 11s. 2d. on 1st July 1949. The receipt given by Messrs. Flint &Marrie shows that this sum was made up of 23,500 pounds purchase money and 3,565 pounds 11s. 2d. interest at 3 1/4% from 31st March 1944 to 30th November 1948. The date 31st March 1944 from which interest was calculated was the date on which the Housing Commission had formally taken possession. (at p661)

15. The argument for the taxpayer was that, although the transaction took the form of a sale, it was made under compulsion and was not in law a sale as it was not the result of offer and acceptance between a willing vendor and purchaser. It is, I think, impossible to say whether the taxpayer really regretted that the land had been resumed. Because it bargained for a higher sum than was at first offered by way of compensation and pressed its claim persistently until an acceptable sum was offered does not, I consider, make the transaction any the more or any the less a sale than it would have been if the first sum offered had been accepted. In the end the parties were agreed on a sum as compensation. If they had not come to an agreement, the sum to be paid as compensation would have been settled by arbitration under the statutory procedure. This Court has decided the very question, and decided it against the taxpayer's contention here, in Smith v. Federal Commissioner of Taxation (1932) 48 CLR 178 . Mr. Gillard, however, submitted that that decision must be taken to have been now displaced by the decision of the House of Lords in Kirkness v. John Hudson &Co. Ltd. (1955) AC 696 . In the latter case it was held by most of their Lordships that a sale in its true sense imports a mutual assent and that a transaction in which that is lacking is not strictly a sale. But it was also recognized that the word might be used with a wider meaning. In that case the question turned on the English Income Tax Act 1945, s. 17 (1) (a). It arose because under the Transport Act 1947 the property in all privately owned railway waggons that at the time were under requisition under the Defence (General) Regulations 1939 was transferred to the British Transport Commission, and compensation was thereupon payable in accordance with a fixed scale, based upon the age and type of the waggons without reference to their state of repair or actual value. The question was whether the waggons were "sold" within the meaning of s. 17 (1) (a) of the Income Tax Act 1945, a provision dealing with cases "where . . . machinery and plant is sold". That case has little resemblance to this. There, there was a general statutory expropriation of chattels with compensation to be paid at a scheduled rate irrespective of the actual value of the particular chattel. Here, there was a resumption of particular land by the ordinary procedure of notice to treat and a price thereafter arrived at by negotiation. In Henty House Pty. Ltd. (In Voluntary Liquidation) v. Federal Commissioner of Taxation (1953) 88 CLR 141, at p 155 , this Court said that the decision of Upjohn J., the judge of first instance in Kirkness v. John Hudson &Co. Ltd. (1953) 1 WLR 749 was not inconsistent with Smith v. Federal Commissioner of Taxation (1932) 48 CLR 178 . The decision of Upjohn J. was upheld by the Court of Appeal; and it was the decision of the Court of Appeal that was affirmed by the House of Lords. I think that the actual decision in Smith's Case (1932) 48 CLR 178 is consistent also with what was said in their Lordships' speeches: and it governs this case. In Nalukuya v. Director of Lands (1957) AC 325 the Privy Council said: "it is perhaps worth noticing that several of the speeches in Kirkness v. John Hudson &Co. Ltd. (1955) AC 696 recognize that in the field of compulsory acquisition of land such words as 'sale' and 'purchase' are frequently used in connexion with transactions by which the transfer of ownership in land takes place in the absence of the element of mutual assent" (1957) AC, at p 332 . In my view, s. 26 of the Income Tax and Social Services Contribution Assessment Act can be taken as containing an example of such extended use. Section 26 reflects and should be read in the reflected light of a general principle: that is that if property be acquired for the purpose of profit-making by dealing in it by sale, as distinct from for the purpose of retaining it as an income producing capital asset, then a surplus received when it is realized is, in an economic sense, received on income account not on capital account. It matters not, for the application of the general principle, whether the actual realization occurred when it did and as it did as a result of compulsion or pressure or purely voluntarily: this is emphatically so when the actual amount obtained on realization is arrived at by mutual assent after negotiation. (at p663)

16. In my view, this case falls clearly within s. 26. It certainly has not been shown not to do so; and the onus is on the taxpayer to show that the assessments objected to were excessive. (at p663)

17. In view of the findings I have made, it is unnecessary to consider the amount paid by the Housing Commission by way of interest upon the compensation price separately from that price. It becomes immaterial that it was dealt with separately in the assessments. The actual figures are not in dispute. The sums objected to - namely 3,566 pounds (interest) and 19,934 pounds (profit arising from sale to the Housing Commission) - were properly included in the assessable income of the taxpayer for the year 1950. The profit arising from sales (of portions of the residue of land not taken by the Housing Commission) made in the income tax years 1953 and 1954 also formed part of the assessable income in those years (1953, 1,190 pounds: 1954 1,730 pounds). The appellant withdrew its objections to certain sums claimed by the Commissioner of Taxation under s. 226 (2) of the Act. (at p664)

18. In the result, therefore, I dismiss the appeal with costs and confirm the amended assessments issued on 7th December 1954 in respect of the years 1950 and 1953, and the assessment issued on 29th April 1955 in respect of the year 1955. (at p664)

Orders

Appeal dismissed with costs. Assessments confirmed.