Commissioner of Taxation v Nandan, Nitya
[1995] FCA 1046
•1 DECEMBER 1995
CATCHWORDS
INCOME TAX - Appeal to the Administrative Appeals Tribunal (Taxation Appeals Division) - partnership agreement providing for division of profits equally - variation by deed of dissolution -retiring partner to receive specific amount as "share of the undrawn profits of the partnership" in the current year - whether retiring partner assessable as to specific amount or as to half of profit as subsequently ascertained - whether question of law
Chateney v Brazilian Submarine Telegraph Company Limited [1891] 1 QB 79
Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337
Administrative Appeals Tribunal Act 1975 (Cth) s 44
Income Tax Assessment Act 1936 (Cth) s 90
Commissioner of Taxation v Nitya Nandan
(No. TG 18 of 1995)
Judge: Heerey J
Date: 1 December 1995
Place: Hobart
IN THE FEDERAL COURT OF AUSTRALIA )
)
TASMANIAN DISTRICT REGISTRY ) No. TG 18 of 1995
)
GENERAL DIVISION )
B E T W E E N:
COMMISSIONER OF TAXATION
Appellant
- and -
NITYA NANDAN
Respondent
JUDGE: Heerey J
DATE: 1 December 1995
PLACE: Hobart
IN THE FEDERAL COURT OF AUSTRALIA )
)
TASMANIAN DISTRICT REGISTRY ) No. TG 18 of 1995
)
GENERAL DIVISION )
MINUTE OF ORDERS
The Court orders that:
The application will be dismissed with costs, including reserve costs.
The decision of the Administative Appeals Tribunal made on 10 March 1995 is affirmed.
NOTE: Settlement and entry of orders is dealt with in
Order 36 of the Federal Court Rules
B E T W E E N:
COMMISSIONER OF TAXATION
Appellant
- and -
NITYA NANDAN
Respondent
JUDGE: Heerey J
DATE: 1 December 1995
PLACE: Hobart
REASONS FOR JUDGMENT
The respondent Mr Nitya Nandan carried on a pharmacy practice in partnership with Mr John Liddy. On 30 July 1992 the two men entered into a deed of dissolution of the partnership as from 1 July 1992. The Commissioner included in Mr Nandan's assessable income for the 1992 tax year the sum of $35,332 being 50 per cent of the net profit of the partnership for that year. Mr Nandan contended that he should be assessed for only $15,000 being his share of the 1992 net profits as agreed with Mr Liddy. Mr Nandan's contention was upheld by the Administrative Appeals Tribunal (Taxation Appeals Division) constituted by Deputy President A M Blow. The Commissioner now appeals to this Court.
The Partnership
The partnership was constituted by an agreement in writing between Mr Nandan and Mr Liddy dated 7 November 1980. Mr Nandan in effect bought a half share in an existing practice being carried on by Mr Liddy. By clause 4 the partnership was deemed to have commenced on 1 August 1980 and was to continue for a term
of three years from that date and thereafter indefinitely unless determined in the manner provided for. Clause 17 provided for termination on three months written notice by one partner in which event the other partner would have an option to purchase the share of the retiring partner at a price calculated by taking 12.5 per cent of the gross turnover for the year to the previous 30 June and 50 per cent of plant, debtors and stock.
By clause 9 the partners were to be "entitled to the partnership property and the net profits of the partnership in equal shares". Clause 11 made the usual provision for the keeping of books and preparation of annual accounts and for the division of the net profits (if any) between the parties equally. Clause 12 provided that during the continuance of the partnership each partner could draw out of the partnership bank account a monthly sum of $1000 "on account of his share of the profits" but if the account at the end of the year showed drawings were in excess of the partnership share then the partner should repay that excess to the account.
The Dissolution
The case before the Tribunal and in this Court turned on the construction of the dissolution deed and in particular clause 11 which provided:
11.1Clause 9 of the Partnership Agreement is amended by adding at the end thereof the words "or in such other shares as the parties shall agree upon".
11.2The Retiring Partner shall be entitled to Fifteen thousand dollars ($15,000) as his share of the undrawn profits of the partnership in the financial year ending 30th June 1992.
11.3The Retiring Partner shall make no claim in respect of undrawn profits in any prior period.
There was a body of evidence before the Tribunal concerning the negotiations which resulted in the final form of the dissolution deed. It is permissible to look at negotiations insofar as they establish objective background facts and the subject matter of the contract, but not for the purpose of ascertaining the actual intentions and expectations of the parties: Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352. Applying these principles, the evidence before the Tribunal supported its findings that
From the commencement of the partnership until 30 June 1991 drawings exceeded partnership profits. As at 30 June 1991 there were no undrawn profits;
By June 1992 agreement had been reached that Mr Liddy would buy out Mr Nandan's interest in the partnership for a lump sum of $200,000. This amount was subsequently increased to $225,000 to provide for equal distribution of a government grant of $50,000 for the closure of one of the partnership's pharmacies;
In June it was expected that there would be a profit for the current year but the extent of that profit was not known. Accounts for the nine months to 31 March 1992 showed a net profit of $23,750.82. At a meeting in June Mr Liddy estimated the profits for the full year at about $30,000, and
There had been no drawings against profits during the 1992 financial year.
In that setting the deed provided for dissolution of the partnership as from 1 July 1992 and the continuance of the business by Mr Liddy (cl 1) with releases by Mr Liddy of Mr Nandan (cl 2). By clause 3 Mr Nandan, in consideration of $225,000 and the agreement and covenants therein, assigned to Mr Liddy:
ALL THAT the one half share and all other (if any) his respective share and interest of and in the said business and the property assets credits effects and goodwill thereof including the stock-in-trade and other personal chattels and effects TO HOLD the same unto the continuing partner absolutely as from the 1st day of July, 1992.
The parties were to be entitled equally to the money in certain accounts (cl 7) and to certain silver bars and gold coins (cl 8). Mr Nandan was to obtain a refrigerator (cl 9.1) and certain other items of plant and equipment (cl 9.2). By cl 12.1 Mr Liddy consented to pay all debts of the partnership as from 1 July 1992 and to indemnify Mr Nandan against such debts. By cl 14 Mr Nandan appointed Mr Liddy as attorney to recover the debts, estate and effects of or due or owing to the partnership with power to settle all debts and claims.
On 4 May 1993 the accountants fo the partnership lodged a partnership return for the 1992 tax year together with a covering letter advising the Commissioner that the parties had not reached agreement as to their interpretation of the deed of dissolution. The letter went on to state that the accountants had been instructed by Mr Liddy to lodge the partnership return reflecting an equal distribution of profit with that share reflected in his personal return and by Mr Nandan to lodge his personal return with his share of partnership profit disclosed as $15,000.
The accounts of the partnership for the year ended 30 June 1992 showed a net profit of $70,664.
The Tribunal's Decision
After reviewing the facts and making in substance the findings to which reference has already been made, the Tribunal correctly observed:
In interpreting the relevant provisions of the dissolution agreement, its meaning must "be collected from the whole of the agreement, and ... greater regard is to be had to the clear intention of the parties than to any particular words which they may have used in the expression of their intent": Ford v Beech (1848) 11 QB 852 at 866.
The Tribunal pointed out that the expression "undrawn profits of the partnership in" the periods referred to in cl 11.2 and 11.3 must be taken to mean undrawn profits as at a particular date which was the end of a given period. The Tribunal then stated:
It must also follow that clause 11.2, which related to "the undrawn profits of the partnership in the financial year ending 30th June 1992", must have been intended to relate to the profits, from which there had been no drawings, of the partnership in respect of the financial year ending 30 June 1992.
For these reasons I believe that, if the taxpayer were to sue his former partner for the balance of one half of the partnership profits for the year ended June 1992, the court would find as a fact that the meanings of the relevant clauses of the dissolution agreement were such that the taxpayer was entitled only to $15,000 from the profits for that year.
The Tribunal accordingly set aside the Commissioner's decision
and remitted the matter to the Commissioner for reconsideration in accordance with a direction that the taxpayer's assessable income from the partnership for the year ended 30 June 1992 amounted to only $15,000.
The Commissioner's Argument
Counsel for the Commissioner contended that the Tribunal had erred in law by holding that by the terms of the dissolution deed Mr Nandan and Mr Liddy had agreed to vary their entitlement to share net profits of the partnership equally between them. He argued that the reference to "undrawn profits" in cl 11.2 of the dissolution deed was not to be construed as a reference to the net income of the partnership within the meaning of s 90 of the Income Tax Assessment Act 1936 (Cth). It merely conferred, he said, a right to "deplete the assets" of the partnership by a further $15,000.
Conclusion
Contrary to the contention of counsel for Mr Nandan, the Commissioner's argument does involve a question of law for the purposes of s 44 of the Administrative Appeals Tribunal Act 1975 (Cth). The construction of the dissolution deed, in the sense of the legal effect to be given to the words in it, is a question of law: Chateney v Brazilian Submarine Telegraph Company Limited [1891] 1 QB 79 at 85.
However in my opinion the construction placed on the deed by the Tribunal was correct. As the 1992 financial year was drawing to a close it was in the contemplation of the parties that there would be profits for that year, but of course until the year ended it was not possible to say with certainty what those profits would be. Absent some other arrangement, those profits would be shared equally. The parties were entitled to make some other contractual arrangement, whether by varying the percentage proportions which each would take, or by stipulating that one would take a fixed sum and the other whatever remained. (The Commissioner eschewed any suggestion of collusion; indeed the parties were not merely at arm's length but had for some time been in a relationship of considerable acrimony.)
In that context cl 11 must be taken as fixing Mr Nandan's share of profits for the 1992 year as something different from the 50 per cent to which he would otherwise have been entitled. He was now to get $15,000 and Mr Liddy the rest.
The reference to "undrawn" profits does no more than confirm the agreed fact that there had been no drawings against, or on account of, the 1992 profits by either partner. The Commissioner's argument involved imputing to the parties an understanding or belief that "profits" were a physically separate asset of the business rather than a figure to be struck at the end of the relevant accounting period after taking account of income and expenditure. I would be reluctant to construe the deed in a way necessarily implying that the parties, who were professional men acting on legal and accounting advice, were so ignorant of fundamental commercial concepts. I am satisfied however that on the plain meaning of the deed of dissolution it has the effect for which Mr Nandan contends.
The application will be dismissed with costs, including reserved costs. The decision of the Tribunal made 10 March 1995 is affirmed.
I certify that this and the preceding seven (7) pages are a true copy of the reasons for judgment of his Honour Mr Justice Heerey.
Dated: 1 December 1995
Associate
Appearances
Counsel for the applicant: Mr P Roach
Solicitor for the applicant: Australian Government Solicitor
Counsel for the respondent: Mr A. Abbott
Solicitor for the respondent: Dobson Mitchell & Allport
Date of hearing: 15 November 1995
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