Commissioner of Taxation v Suttons Motors (Chullora) Wholesale Pty Ltd

[1983] FCA 104

Re: COMMISSIONER OF TAXATION
And: SUTTONS MOTORS (CHULLORA) WHOLESALE PTY. LIMITED (1983) 68 FLR 181
No. VG122 of 1982
Income Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIAN DISTRICT REGISTRY
GENERAL DIVISION
Bowen C.J.(1), Toohey(2) and Jenkinson(3) JJ.

CATCHWORDS

Income Tax - Whether vehicles held under floor-plan agreement were trading stock under s.82D(1) Income Tax Assessment Act - Definition of trading stock - Whether ss.51 and 82D(1) interdependent - Character of floor-plan agreement - Meaning of acquired in s.82D(1) - Treatment of evidence as to accounting practice.

Income Tax Assessment Act 1936 ss.6, 51, 82B(1) and 82D(1).

Income Tax - Allowable deductions - Whether trading stock valuation adjustment deduction available - Taxpayer wholesaler of motor vehicles held on floor plan - Whether vehicles trading stock - Whether vehicles acquired - Evidence of accounting practice - Income Tax Assessment Act 1936 (Cth), ss 6, 51(1), 82D.

HEADNOTE

The taxpayer claimed a deduction under the then trading stock valuation adjustment provision of Div. 3 of Pt III of the Income Tax Assessment Act 1936 (Cth). The trading stock in respect of which the claim was made were new Holden motor vehicles. The taxpayer was a wholesaler which acquired vehicles from the manufacturer and sold them to a single retailer, its parent company. It acquired the vehicles pursuant to a floor plan arrangement on which a finance company associated with the manufacturer provided finance to allow the taxpayer to keep the vehicles. The taxpayer only bought each vehicle just before it sold it to the retailer. Before that, the taxpayer had no title to the vehicles and no obligation to buy them. The taxpayer treated the vehicles as trading stock in its accounts, and claimed a deduction for a trading stock adjustment. The Commissioner disallowed the claim, and the taxpayer successfully appealed to the Supreme Court of Victoria. The Commissioner appealed.

Held: that the appeal be dismissed. Although the taxpayer did not own the vehicles, for all practical purposes it had acquired them within the meaning of s. 82D(1) of the Act. The vehicles were its trading stock in the ordinary commercial sense, and the accounting evidence supported this view. The definition of trading stock in s. 6 was not exhaustive. The deduction claimed was allowable.

HEARING

Sydney, 1983, March 8, 9; June 3. #DATE 3:6:1983

APPEAL.

Appeal against the allowance by Tadgell J. of the Supreme Court of Victoria of the taxpayer's appeal against the disallowance by the Commissioner of its objection to an assessment in respect of the year of income ended 30 June 1977.

D. Graham Q.C. and N. Young, for the appellant.

N.H.M. Forsyth Q.C. and G. Hill, for the respondent.

Cur. adv. vult.

Solicitor for the appellant: B.J. O'Donovan, Commonwealth Crown Solicitor.

Solicitors for the respondent: Moules.

J.H.T.

ORDER

1. The appeal be dismissed with costs.

I have read the reasons for judgment of Toohey J. and Jenkinson J. I agree with their conclusions but will add some observations.

JUDGE1

Counsel for the Commissioner argued that Suttons did not have any trading stock on hand at the relevant time for the purposes of s.82D(1). His argument was based on the proposition that s.82D(l) refers to trading stock of the taxpayer and that merchandise cannot be classed as trading stock of the taxpayer where he does not own it, has no legal obligation to become the owner of it and has incurred no financial commitments in respect of it. He also argued that it is incorrect, as a matter of accounting practice, to treat inventory items held under hire purchase or similar agreements as assets.

Counsel for the taxpayer submitted that the vehicles in question fulfilled the same function and had all the same incidents as trading stock; that they were regarded commercially and practically by businessmen, accountants and auditors alike as being part of the taxpayer's trading stock; and, that the question whether or not a particular item was trading stock should be determined by reference to commercial reality.

There are some words of definition of trading stock in the Act. Section 6 provides that trading stock includes anything 'produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange'. It also includes livestock. The definition of trading stock in s.6 does not purport to be exclusive (Modern Permanent Building and Investment Society v Federal Commissioner of Taxation (1958) 98 C.L.R. 187 at p.190; Federal Commissioner of Taxation v St. Hubert's Island Pty. Limited (1978) l38 C.L.R. at p.235). Certain items are specifically excluded from the classification of trading stock for the purposes of s.82D by s.82B(1) however that does not affect anything in the present case.

Certain other sections of the Act contain references to trading stock. For example, ss.28-37 provide for the way in which trading stock on hand at the beginning of the year of income is to be taken into account in ascertaining whether or not the taxpayer has a taxable income. However, no definition of trading stock is contained in these sections.

The Court was referred to s.51 of the Act. That section provides that all losses and outgoings incurred in gaining or producing assessable income shall be allowable deductions, with certain exceptions. Section 51(2) provides that expenditure incurred or deemed to have been incurred in the purchase of stock used by the taxpayer as trading stock shall be deemed not to be an outgoing of capital or of a capital nature. It was argued by Counsel for the Commissioner that there is a link between ss.82D(1) and 51 in that whenever trading stock is acquired for the purposes of s.82D(1) the taxpayer necessarily obtains a s.51 deduction. The Commissioner's submission was thus that, in the absence of an entitlement to a deduction under s.51 in respect of goods, the goods in question cannot be treated as trading stock for the purpose of s.82D(1). The Commissioner argued that Suttons would not be entitled to a deduction under s.51 in respect of the cars, since it had not incurred any expenditure at the time the vehicles were delivered. The hiring charges paid by Suttons to G.M.A.C. would not, it was asserted, fall within the concept of outgoings contained in s.51. Counsel for the taxpayer argued on the other hand that there could be a claim made for a s.51 deduction for purchases as the vehicles were delivered; the option to purchase contained in the floor plan agreement being similar to a conditional sale.

It may well be that the hiring amounts which are included in the invoice to G.M.A.C. when the vehicles are delivered could be described as '.....at best an inchoate liability in process of accrual but subject to a variety of contingencies' Federal Commissioner of Taxation v James Flood Proprietary Limited (1953) 88 C.L.R. 492 at p.508 and therefore not an outgoing actually incurred for the purposes of s.51. Whether, in fact, Suttons are entitled to claim a deduction under s.51 in respect of vehicles delivered to it in the course of its business is not however relevant in this case, given the view I take of the Commissioner's contention as to the interdependence between ss.51 and 82D(1).

There is nothing in the Act itself to suggest that the concept of trading stock in s.82D(1) is dependent for its operation on the applicability of s.51. Counsel for the Commissioner argued that the provisions of the Act dealing with trading stock formed part of a code, and therefore to be eligible as trading stock for one of those provisions, goods had to be trading stock for the purposes of all the relevant provisions. This is not supported by anything in the statute. The Court was referred to a passage in the judgment of Dixon C.J. in John Fairfax and Sons Pty. Ltd. v Federal Commissioner of Taxation (1958) 101 C.L.R. 30 at p.35, which it was suggested lent support to the Commissioner's submission. That passage relates to s.51(2) and contains the comment that the sub-section was no doubt considered necessary since trading stock, being circulating capital, is a category within which outgoings of capital could fall. However, I do not read his Honour's comments as indicating that before an item of merchandise can be classified as trading stock for the purposes of s.82D(1), the taxpayer must be able to claim a deduction under s.5l in respect of that item. Gibbs J. as he then was in Curran v Federal Commissioner of Taxation (1974) 131 C.L.R. 409 at pp.419-421 appeared to recognize that there may be situations where deductions are available in respect of trading stock even though no deduction under s.51 would be attracted by that stock. In that case, his Honour referred to situations where the taxpayer might receive articles of trading stock by way of gift or under a bequest.

In this case I do not consider that the availability or unavailability of a deduction under s.51 in respect of the motor vehicles is of significance in determining whether the vehicles were trading stock under s.82D(1).

What must be considered is whether goods held by a taxpayer under a floor plan agreement such as the present can properly be classed as trading stock. The Commissioner argued that at most Suttons was a bailee of the vehicles in question, and as such did not have the requisite degree of ownership or control over the vehicles to be entitled to a deduction under the trading stock provisions. This argument was based on the premise that the word 'acquired' where it appears in the definition of trading stock in s.6 means the acquisition of title or of the legal right to obtain title.

Counsel for the Commissioner submitted that the agreement was in form and in effect a hire purchase agreement or some other kind of chattel mortgage. Support for that contention was derived essentially from the language of the agreement.

The learned trial Judge, however, held the agreement was in essence a sale by the manufacturer, G.M.A.C., to Suttons, the nature of the transaction involving a loan by G.M.A.C. to Suttons on the security of the vehicle itself.

The floor plan agreement would seem at first sight very similar to a hire purchase agreement. The normal incidents of ownership are reserved until full payment of the hiring amount and performance of all the conditions of the agreement. Suttons is seemingly placed in the position of bailee of the goods, with the duty to keep the vehicles insured and in good condition. However, there are certain anomalies in the agreement. There is no obligation upon Suttons, for example, to make regular payments to G.M.A.C. Indeed, in practice, Suttons never makes a payment to G.M.A.C., such payments are made by the retail company. Moreover, despite the fact that there are certain sanctions laid down for breach of the agreement, it would seem that Suttons is constantly placing itself in breach of it with the acquiescence of G.M.A.C. This arises from the provision in clause ll of the agreement which reads, rather oddly in the circumstances:-

'During hire the Dealer shall keep the product in his sole possession or control and free from liens or charges and shall not sell sub-let transfer or dispose of or part with the possession or control of or any interest or benefit therein or in this agreement or attempt so to do.....'

That clause would seem to preclude Suttons from selling or attempting to sell the vehicles under the plan until it had become the owner of them. However, in practice, Suttons does not attempt to become the owner of the vehicles until a customer is found. This practice is encouraged by G.M.A.C. as can be seen from G.M.A.C.'s explanation of its plan to dealers (Exhibit C):-

'The dealer may sell the vehicles at retail in the ordinary course of business, paying for them by promptly remitting to G.M.A.C. the outstanding balance on the Dealer Delivery Advice as well as the General Motors Holden's Sales Pty. Limited fee and all other moneys due. Such payment automatically gives title in the vehicles to the dealer....'

Thus, although the formal agreement between G.M.A.C. and Suttons provides for G.M.A.C. to retain ownership of the vehicles, it appears that with G.M.A.C.'s approval Suttons has always acted in a contrary manner. The evidence indeed suggests that all parties concerned _ G.M.A.C., Suttons and the retail company, treated the vehicles as being part of the stock of Suttons available to be sold in the ordinary course of Suttons' business.

It would seem more accurate to characterise the agreement as essentially sui generis, albeit similar in many respects to a hire-purchase agreement. The question remains whether goods held under that agreement can properly be classed as trading stock for the purposes of s.82D(1).

Most of the cases in which s.82D(1) has been considered have been approaching the issue whether certain property is capable by its nature of being trading stock. They are thus of only limited use. Here the issue focusses rather on the relationship between the taxpayer and the goods claimed to constitute trading stock. As mentioned earlier, the statutory meaning of trading stock in s.6 is not exhaustive but rather operates by way of extension of the ordinary meaning of trading stock. In addition, regard must be given to the ordinary commercial usage of the term, as was emphasised by Mason J. in the St. Hubert's Island Case supra at p.226.

Counsel for the Commissioner referred the Court to Farnsworth v Federal Commissioner of Taxation (1949) 78 C.L.R. 504. This contains in the judgment of Rich J. (at p.515) a suggestion that ownership might characterise stock in trade. However, the basic factor underlying the decision appears from the judgment of Dixon J. (at p. 518). While his Honour considered in some detail the kind of rights retained by the owner once she had delivered fruit to the packing company, he added that that mattered little; the basis of his decision was rather that the taxpayer's dried fruit had ceased to be 'on hand' when it was delivered to the packing company. Indeed, possession of goods seems to be necessary before trading stock can be regarded as 'on hand'. Where goods have not been delivered they generally cannot be treated as trading stock on hand despite the fact that property in the goods may have passed to the taxpayer: (J.H. Young & Co. v Inland Revenue Commissioner (1925) 12 Tax Cases 827; J.W. Green & Co. Limited v Revenue Commissioner (1927) I.R. 240).

The fact that Suttons does not immediately become the owner of the vehicles when they are delivered is not necessarily determinative of the question whether the vehicles may be classed as trading stock. The question is whether Suttons has 'acquired' the goods for the relevant purpose? There seems to be no obstacle as far as the purpose of the acquisition is concerned _ Suttons obtains the vehicles with a view to their ultimate sale to a customer. Counsel for the Commissioner argued however that it could not be said that Suttons had 'acquired' the vehicles, interpreting 'acquired' to mean 'acquired the legal title or right thereto'. 'Acquired' is a word with a wide range of possible applications. I can find no justification for limiting it to situations where what has been acquired is the legal title or right thereto.

The situation here was that the taxpayer had the possession and control of the vehicles, had the right to acquire title to them and had assumed the risk with respect to them. Commercially and practically the taxpayer was committed to the ultimate sale of the vehicles to consumers and thus to the ultimate purchase of the vehicles from G.M.A.C. It seems to me somewhat artificial and strained to suggest that Suttons had not acquired the vehicles for the purposes of s.82D(1).

I turn to the Commissioner's second submission that as a matter of accounting practice it is incorrect to treat goods held under a floor plan or similar arrangements as trading stock. The thrust of this submission is that the opinions of the two expert witnesses, Professor C.G. Peirson and Mr. J.D. Balmford, were not supported by textbooks on accountancy practice. I will not canvass the accounting evidence in detail in view of the conclusion I have reached on the Commissioner's first submission. Clearly, however, the Court is entitled to look at accounting practice as an aid to discovering the appropriate commercial treatment of the goods in question. This is so, as Dixon J. explained, because income, profits and gains are conceptions of the world of affairs and particularly of business (Commissioner of Taxes (S.A.) v Executor Trustee and Agency Co. of South Australia Limited (Carden's Case) (1938) 63 C.L.R. 108 at p.152). Hence the judicial tendency to look at the ordinary commercial and accounting principles and practices which can be seen in such cases as Arthur Murray (N.S.W.) Pty. Limited v Federal Commissioner of Taxation (1965) 114 C.L.R. 314 and the St. Hubert's Island Case supra. Nothing in the learned trial Judge's reasons for judgment indicates that he placed undue weight on the accounting evidence before him. Although the Commissioner has argued that the expert evidence was contrary to the standard principles of accountancy, I consider it is unnecessary to determine that issue now.

I would dismiss the appeal with costs.

JUDGE2

Section 82D(1) of the Income Tax Assessment Act 1936 reads:

"82D(1) Where a taxpayer has carried on a business during the whole of the year of income, being a business that was carried on by the taxpayer immediately before the commencement of the year of income, there shall be allowed as a deduction from the assessable income of the taxpayer of the year of income an amount equal to the prescribed percentage of the value of any trading stock on hand in relation to the business at the commencement of the year of income".

The "prescribed percentage" is calculated in accordance with a complex formula contained in s.82D. It was accepted by the parties in the proceedings before this court, as it had been accepted in earlier proceedings, that the prescribed percentage for relevant purposes was 5 percent.

The question to be resolved may be stated quite shortly - did the respondent, Suttons Motors (Chullora) Wholesale Pty. Ltd. ("the taxpayer"), have trading stock on hand in relation to its business at the commencement of the year of income ended 30 June 1977? The answer concerns the interpretation and construction of s.82D and other provisions of the Act and some assessment of the taxpayer's operations.

The taxpayer claimed that at the commencement of the relevant year of income it had trading stock on hand in relation to its business to the value of $1,013,609 and that it was entitled to a deduction from its assessable income of that year of an amount equal to 5 percent of that value, $50,680. This claim had the effect of reducing the taxpayer's assessable income of $500 to nil. The Commissioner denied that the taxpayer had any relevant trading stock on hand and assessed the income of $500 to tax. An objection to that assessment was disallowed by the Commissioner but was upheld on appeal to the Supreme Court of Victoria. The Commissioner appealed to this court from the decision of the Supreme Court.

The taxpayer is part of an organization of some complexity but the following description is, I think, sufficient for the purposes of this appeal. The taxpayer operates as a wholesaler and its business is to obtain new Holden motor vehicles manufactured by General MotorsHolden's Ltd. ("GMH") and to sell them to a retailer, Suttons Motors (Chullora) Pty. Ltd. ("the retailer"). The retailer holds all of the issued shares in the capital of the taxpayer. Although in theory the chain is from GMH to the taxpayer to the retailer, there is no consistent differentiation in the documentation employed. As the learned primary judge pointed out, "in many of the documents which were put in evidence each company is often found indifferently to be referred to as 'the dealer'".

The wider corporate structure includes General Motors Corporation ("GM"), domiciled in the United States of America, of which GMH is a subsidiary. General Motors-Holden's Sales Pty. Ltd. ("GMH Sales") is a subsidiary of GMH. On the financing side, General Motors Acceptance Corporation Australia ("GMAC Australia") is a subsidiary of General Motors Acceptance Corporation ("GMAC"), an American company which itself is a subsidiary of GM.

GMAC Australia provides finance for those who wish to buy vehicles manufactured by GMH. In part this is done under the GMAC retail plan, designed to assist the retail purchase of motor vehicles and in part under the GMAC wholesale plan, which provides finance for the purchase of vehicles by the motor trade.

The business practice of the taxpayer may be described in this way. In what follows I have relied largely upon the judgment of the learned primary judge whose findings were for the most part not challenged.

The taxpayer is the retailer's only source of supply of new vehicles. The taxpayer sells to the retailer only to enable the latter to fulfil a retail sale already made. When the retailer requires a vehicle, the taxpayer places an order with GMH Sales, specifying type, colour and other requirements. The taxpayer has no premises or staff of its own; it uses those of the retailer. And so, when the retailer requires a vehicle, delivery is effected by GMH Sales at the direction of the taxpayer. The vehicle is stored at premises made available to the retailer by one of its subsidiaries.

The account emanating from GMH is in two parts, printed on a single sheet but divided by a perforated line. One part is a charge raised by GMH to GMAC Australia against the taxpayer's account. This represents the manufacturer's price to the wholesaler. The other account is raised by GMH Sales to GMAC Australia against the account of the retailer. This is a small amount, comprising a fee and delivery charge.

Pursuant to the GMAC wholesale plan, GMAC Australia pays to GMH and to GMH Sales the amounts due to them on the accounts. These amounts are paid on behalf of the taxpayer and retailer respectively.

Upon delivery from GMH to the taxpayer or to its order, the taxpayer raises an appropriate stock record and debits an account in its books, entitled "stock - new cars", with the amount charged against its account by GMH and credits an account, entitled "notes payable GMAC", with the same amount. The retailer raises corresponding entries in its books in respect of the amount charged against its account by GMH Sales. In the words of the learned primary judge :

"Upon the raising of these entries the vehicle is regarded by all parties concerned as available to be sold by the appellant to the retail company and by the retail company to a consumer in the ordinary course of business".

The taxpayer invoices the retailer for the vehicle at a price equal to the sum previously paid on its behalf to GMH by GMAC Australia, together with an amount equal to the sales tax for which the taxpayer will be liable in respect of the sale to the retailer. The retailer obtains payment from its customer and then discharges its own liability to GMAC and, on behalf of the taxpayer, it discharges the taxpayer's liability to GMAC. This is ordinarily done by one cheque drawn by the retailer.

The object of the wholesale plan is to give GM's dealers access to a supply of motor vehicles without an initial outlay by them of the wholesale price or of sales tax and without the need to obtain finance from an external source. By interposing the taxpayer a sale to the retailer is deferred and thereby sales tax is deferred. As, in the year of income, sales tax was at the rate of 27.5 percent upon the price of the last sale by wholesale of a new motor vehicle, the arrangement had considerable financial advantages. In describing the wholesale plan or floor plan, his Honour said that it seemed "to depend on all sides to no small extent on a well-understood pattern of conventional conduct as well as on the written agreement, supplemented as it is by reference to the explanatory memorandum".

The written agreement evidencing the floor plan arrangement is in two parts. The first is between GMAC Australia and the taxpayer. The agreement speaks of a hiring by GMAC Australia to the taxpayer, of the product being at the taxpayer's risk on delivery, of the taxpayer keeping the product in his sole possession or control and not selling or disposing of the vehicle during hire. There is a right in GMAC Australia to determine the hiring on default and another clause which enables the taxpayer at any time to determine the hiring by returning the product to GMAC Australia in the condition in which it should be under the agreement. No hiring term is specified. The amount payable in respect of the hiring is the net total of the two invoices rendered, one to the taxpayer and one to the retailer, liability for which will have been met by GMAC Australia.

I set out clause 15 in full:

"15. Upon payment of the said hiring amount at the times provided, the billing of General Motors-Holden's (Sales) Pty. Ltd. including deferral charge (if applicable) and all other moneys whatsoever owing by the Dealer to the Owner and if the Dealer has performed all his agreements hereunder he shall become the owner of the product but until such event the product shall remain the exclusive property of the Owner".

Thus the agreement is by way of a hiring, with no obligation on the hirer to purchase and indeed a right in the hirer to return the vehicle at any time. Title vests in the hirer on payment of the hiring amount and payment is made by GMAC Australia. As the learned primary judge noted, although clause 11 precludes any sale of a vehicle during hire, it is intended that a vehicle upon delivery will be available to be sold in the ordinary course of the taxpayer's business.

The second category of payment to be made to GMAC Australia is, as his Honour pointed out, by way of interest upon the amount of finance which GMAC has provided to the dealer in respect of the vehicle. In his Honour's words:

"In practical terms it is interest on the total amount paid by GMAC at or shortly after the date of delivery of the vehicle by the manufacturer and is calculated by reference to the period for which GMAC stands out of its money".

As a result of this complex series of transactions, the taxpayer makes no profit upon the sale of any vehicle to the retailer. Its proceeds of sales always equal its costs of sales. It incurs no administrative expenses and its only income in the relevant year, apart from proceeds of sales, was a fee of $500 charged to the retailer "for services rendered in providing motor vehicles at short notice and in consideration of financial expenses saved as a result of the wholesale facility provided".

Before the learned primary judge and before this court the basic propositions advanced on behalf of the Commissioner and the taxpayer were much the same. The Commissioner contended that at no relevant time did the appellant have trading stock on hand in relation to its business within the meaning of s.82D(1). This was on the basis that any vehicle delivered to the taxpayer or to its order was the property of GMAC Australia and that the taxpayer was no more than a bailee, that the taxpayer made no financial outlay for the acquisition or retention of the vehicle and was not committed to buy and was not legally obliged to do so. In the Commissioner's submission an item of merchandise cannot be regarded as trading stock at the relevant time if the taxpayer does not own it and is no more than a bailee. It was only when a retail sale was made by the retailer that the taxpayer acquired title to a motor vehicle and then only to enable the retailer to pass title to its customer.

The taxpayer's case is that the question whether an article is trading stock does not depend upon title but upon the commercial reality of the situation.

Trading stock is defined by s.6 of the Act to include "anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange and also includes livestock". Section 82D is within subdivision BA - Trading Stock Valuation Adjustment and for the purposes of that subdivision s.82B accepts the definition of trading stock in s.6 but goes on to exclude various categories of property, none of which is applicable in the present case.

In the taxpayer's submission s.6 does not provide an exclusive definition of trading stock; reliance was placed on Federal Commissioner of Taxation v. St. Hubert's Island Pty. Ltd. (In Liquidation) (1977-78) 138 CLR 210. The vehicles held by the taxpayer at the commencement of the year of income were regarded by it as part of its trading stock, were treated by commercial people as trading stock and were properly to be regarded for commercial, accounting and taxation purposes as assets of the taxpayer's business of trading in motor vehicles.

The taxpayer adduced evidence before the Supreme Court as to the taxpayer's accounting method and the way in which it treated the vehicles it acquired. There was evidence to show that motor car dealers, not being GMH dealers, treat vehicles similarly held in a similar way. There was evidence of commercial usage from GMAC Australia that that company does not regard the vehicles for which it pays as part of its trading stock and proceeds upon the assumption that they are trading stock of the dealer. In addition there was evidence from a practising chartered accountant and a professor of accounting and finance to the effect that vehicles delivered to the taxpayer or to its order under the floor plan, and remaining unsold, were properly to be treated as assets of the taxpayer although it had not then paid for them or committed itself to do so. At the end of a long and detailed judgment, his Honour concluded :

" . . . the vehicles in question were held by the appellant, a dealer in motor vehicles, as assets of its business, they were trading stock in ordinary commercial parlance and they were available for immediate sale by the appellant in the ordinary course of its business. They were in my opinion . . . trading stock on hand in relation to the appellant's business in terms of section 82D (1)".

That conclusion was challenged on a number of grounds before this court.

The principal propositions advanced on behalf of the Commissioner were as follows:

1. On 1 July 1976, the commencement of the relevant year of income, the taxpayer had made no financial outlay in respect of the vehicles then in its possession. It had incurred no legal obligation to make any outlay. It had not bought the vehicles, nor had it agreed to buy them, nor was it legally committed in any way to the purchase of any of the vehicles. In those circumstances the vehicles were not trading stock within the meaning of that term in s.6 of the Act; they were not trading stock for the purposes of s.28; they were not trading stock for the purposes of any of the other provisions within subdivision B - Trading Stock of Division 2 - Income; and they were not trading stock within s.82D (1) of the Act.

2. On 1 July 1976 the taxpayer had made no payment in respect of the vehicles. It had not incurred any obligation to make a payment which would constitute an outgoing incurred in gaining or producing assessable income nor an outgoing necessarily incurred in carrying on a business and therefore no entitlement to any deduction under s.51 had arisen on or before the relevant date. In the absence of an entitlement to bring to account the vehicles in terms of s.51, the vehicles cannot be treated as trading stock.

In amplifying the first proposition, counsel for the Commissioner took it to be self evident that the reference in s.82D(1) to "any trading stock on hand in relation to the business" is a reference to trading stock of the taxpayer. Counsel for the taxpayer did not challenge that assertion either before the learned primary judge or before this court. For the purposes of his judgment his Honour accepted that to be the case without the need to reach a firm conclusion to this effect.

Counsel submitted that there is a link between s.82D and the trading stock provisions in subdivision B of division 2. These provisions are in large part aimed at determining the value of trading stock and prescribing circumstances in which that stock is to be included in the assessable income of the taxpayer or is to be an allowable deduction. It is true that there are connections between the trading stock valuation adjustment provisions in subdivision BA of division 3 and the trading stock provisions in subdivision B of division 2. For example, s. 82B (5) refers directly to s. 28 and to ss. 36 and 37. But I am unable to find in this connection any indication of what is meant by the expression "trading stock" in s. 82D (1). And although there is in s. 82B (1) a definition of trading stock, that definition is designed expressly to include and to exclude certain types of property, none of which is relevant to the present case. For more general purposes it does not disturb the meaning attached to that expression by s. 6. Equally I am unable to conclude that because in some provisions of the Act, s. 82AG for example (which is part of the investment allowance provision), specific provision is made for assets under lease and because in s. 82AQ (part of the same subdivision), there are specific definitions relevant to the lease of chattels, this throws any light upon the concept of trading stock for the purposes of s. 82D (1). The starting point for determining that meaning must be the definition in s. 6.

As already noted that definition is expressed to include "anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange . . .". The taxpayer had not produced or manufactured the motor vehicles nor, at the relevant date, had it puchased them. Nor, in the Commissioner's submission, had it at the relevant date acquired those vehicles. Counsel for the Commissioner put it this way :

"It is a broad submission that the mere taking of possession by a bailee would not constitute acquisition for the purposes of the definition. What one looks to is the purpose of the acquisition and here you note that the purpose of the acquisition was not immediate re-sale, but simply for storage and having available for ultimate sale by the dealer company".

The most recent authorative analysis of the definition is in St. Hubert's Island Pty. Ltd., supra. At p. 216 Stephen J. noted that by including things acquired for the purposes of manufacture, the definition enlarged the ordinary meaning of the term. In his Honour's view :

"An examination of s. 6 (1) suggests that care has been taken to use 'include' where it is not intended to substitute a statutory meaning for the ordinary meaning of words but, rather, to confer some meaning additional to the ordinary meaning."

Also in his Honour's view at p. 217 :

". . . the statutory meaning only operates cumulatively upon the ordinary meaning of trading stock".

At pp. 224-225 Mason J. considered that the ordinary meaning of trading stock cannot be restricted by a definition, expressed to be inclusive not exclusive. In his Honour's opinion:

". . . it may be doubted whether the definition does more than express inadequately what one might have gathered from the ordinary meaning of the term".

In the opinion of Aickin J. at p.243:

"The definition is not perhaps very helpful because that which it 'includes' would seem to be a greater part or, on one view, the whole, of that which is the ordinary meaning of the term 'trading stock' ".

What emerges from the judgments in St. Hubert's Island Pty. Ltd. is that the definition of "trading stock" in s.6 should not be taken as exhaustive. That which is acquired or purchased for purposes of manufacture, sale or exchange has the statutory character of trading stock. But something which does not possess that character but which falls within the ordinary meaning of the term 'trading stock' also lies within the statutory definition. In saying that I am not to be taken as concluding that the motor vehicles were not, at the relevant date, acquired by the taxpayer. I merely make the point that if the motor vehicles were, within the ordinary meaning of the term, part of the trading stock of the taxpayer at the relevant time, they did not lose that character because they did not fall within any of the statutory categories.

If the definition is not exhaustive there is no need for what is said to be trading stock to have been 'acquired'. In any event there is no reason why that term should be given a narrow or technical meaning. In particular it should not be equated with 'acquired title'. The definition itself distinguishes between 'acquired' and 'purchased'. A comment by Wrottesley J. in Congreve and Congreve v. Inland Revenue Commissioners (1946) 2 ALL E.R. 170 at p.183 is apt:

"As used by lawyers the word 'acquired' has long covered transactions of a purely passive nature and means little more than receiving".

In my opinion goods the subject of a hiring agreement have been acquired by the hirer for the purposes of the definition.

Counsel for the taxpayer pointed to a number of considerations in support of the proposition that, in ordinary language, the motor vehicles were part of the trading stock of the taxpayer. The considerations were as follows. First, at the relevant date the vehicles were on hand in the possession and control of the taxpayer. Second, the taxpayer had a legal right to acquire title to the vehicles at any time it chose. Third, the taxpayer had assumed the risk in relation to the vehicles and obtained the benefit that would come from any appreciation in their value. Fourth, the taxpayer had all the rights that it wanted or needed in relation to the vehicles. Fifth, the taxpayer and the General Motors group expected and intended that title would pass in due course to the taxpayer and from it to the retailer. Sixth, the transactions in vehicles in question were part of the continuous flow of the ordinary course of business of the taxpayer. Seventh, the taxpayer was in practical terms committed to the purchase of the vehicles.

The existence of these considerations was largely supported by the evidence. Their relevance in determing whether the motor vehicles were trading stock of the taxpayer remains to be assessed.

The evidence relied upon by the taxpayer fell into several categories. There was the way in which the taxpayer kept its accounts. There was the way in which other dealers kept their accounts in regard to vehicles under floor plan. There was the evidence of GMAC Australia that commercially the arrangement between it and the taxpayer was a financing one, the roles being lender and borrower respectively. There was evidence that other finance companies concur in GMAC Australia's accounting treatment and that this concurrence was accepted by their auditors. There was the evidence of Mr. Balmford, a chartered accountant of long standing in the profession, and of Professor Peirson, professor of accounting and finance at Monash University.

I do not think it is necessary to trace this evidence in any detail. Mr. Taylor, regional manager and a vice-president of GMAC Australia, referred to the accounts of that company in which vehicles under floor plan are treated as accounts receivable. For its part the accounts of the taxpayer show that when it receives an invoice from GMH it debits "stock, new cars", and credits, "notes payable GMAC", so that from that moment it regards itself as having acquired an asset in the form of stock and a liability in the form of an amount payable to GMAC Australia. There was evidence from Mr. Brown, executive director of the Australian Automobile Dealers Association, that the inclusion by the taxpayer of a stock of vehicles at cost in its balance shett is consistent with the practice of other companies in the motor car industry. Mr. Brown commented:

". . . dealers do show the stock on hand as an asset, the amount owing as a bills payable or a creditor."

Mr. Brown expressed the justification for this treatment in these terms:

". . . the assets are physically in the possession of the dealer, the dealer has to have a benefit in them in that they are his trading stock, and he will sell those assets and obtain the benefit".

Professor Peirson gave evidence, based on his experience with accounting principles, that the appropriate course for a dealer entering into a floor plan agreement with GMAC Australia is to treat the vehicles as an asset and as stock on hand, there being an offsetting amount in the form of a debt to the finance company. In his opinion this was the correct course even though legal title to the vehicles remained in the finance company. Asked for his reasoning to this conclusion, Professor Peirson answered:

"The first is that it is indeed an asset and an asset is defined broadly speaking as future benefits, and the dealer company will obtain the future benefits by selling the vehicle. And in addition to that the accounting standards specify as one of the criterion to - criteria to look at in determining an accounting policy, the criterion of substance over form. And that is to say that the substance of the transaction - so that in accounting for a transaction the substance of the transaction is more important than the legal form of the transaction".

Mr. Balmford also agreed with the taxpayer's accounting treatment of the motor vehicles under floor plan. Although it seems that Mr. Balmford's experience was largely with financing agreements by way of hire purchase, his conclusions were not affected by the fact that the taxpayer had the right to return the vehicle under hire nor was it relevant for accounting purposes that the taxpayer made no profit on the transaction. In Mr. Balmford's view, showing the vehicles as stock, in the case of the taxpayer, gave effect to the basic test under companies legislation "that the account should present a true and fair view of the profit and loss and the assets and liabilities of the financial position of the company".

The evidence to which I have referred only in a general way amply supports the conclusion of the learned primary judge that the motor vehicles were held by the taxpayer as part of its trading stock as that term is understood commercially. It follows that, unless other provisions of the Act require that the motor vehicles be not so treated, they should be seen as part of the trading stock of the taxpayer.

The Commissioner argued that on 1 July 1976 the taxpayer had made no payment in respect of the vehicles nor had it incurred any obligation to do so. Hence, it was said, no deduction had arisen in terms of s.51 of the Act and, in the absence of an entitlement to claim a deduction under that section, the motor vehicles could not be treated as trading stock.

The language of s.51 is well known. It treats as allowable deductions "All losses and outgoings to the extent to which they are incurred in gaining or producing the asessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income . . .". Sub-section (2) deems expenditure incurred in the purchase of stock used by the taxpayer as trading stock not to be an outgoing of capital or of a capital nature, hence capable of answering the description in sub-s. (1). But s.51 does not purport to identify what is trading stock. It does no more than permit expenditure incurred in the purchase of trading stock to be regarded as a qualifying loss or outgoing even though it might ordinarily be regarded as an outgoing of capital or a capital nature. For this reason it seems unprofitable to say anything about the principles enunciated in New Zealand Flax Investmentment Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 179, Federal Commissioner of Taxation v. James Flood Pty. Ltd. (1953) 88 CLR 492 and other decisions referred to by the Commissioner to throw light upon the language of s.51. But in any event it has not been established that the taxpayer was not entitled to a deduction under s.51 in respect of the motor vehicles on hand. For each vehicle the taxpayer incurred a liability to pay a hiring charge. It is true that this was an obligation which could be shed by returning the vehicle in the condition it should have been under the agreement. But as the court pointed out in James Flood Pty. Ltd. at p.506: "It is probably going too far to say that the obligation must be indefeasible".

It is, I think, confusing to seek to apply the requirements of s.51 to s.82D, which prescribes for its own purposes the circumstances in which the value of trading stock may operate as a deduction from the assessable income of the taxpayer.

In my view the Commissioner has failed to show that the conclusion of the learned primary judge was in error and the appeal should be dismissed with costs.

JUDGE3

Appeal from an order of the Supreme Court of Victoria (Tadgell J.), by which the appellant Commissioner's decision to disallow the respondent's objection against his assessment of the amount of the taxable income of the respondent derived during the year of income ended 30 June 1977 was nullified.

The assessment had denied deduction from the respondent's assessable income of any amount under s. 82D (1) of the Income Tax Assessment Act 1936 in respect of certain new motor cars which the respondent claimed to be its "trading stock on hand", in relation to the business that was being carried on by it, on 1 July 1976. The Commissioner's denial of such a deduction rested on his determination that none of the cars was "trading stock", within the meaning of s. 82D (1), of the respondent. That determination was reached, as was the contrary conclusion of Tadgell J., upon a consideration of the contractual arrangements and business understandings pursuant to which the cars were in the respondent's possession on 1 July 1976.

Section 82D (1) provides:

"Where a taxpayer has carried on a business during the whole of the year of income, being a business that was carried on by the taxpayer immediately before the commencement of the year of income, there shall be allowed as a deduction from the assessable income of the taxpayer of the year of income an amount equal to the prescribed percentage of the value of any trading stock on hand in relation to the business at the commencement of the year of income."

Section 82D falls within Subdivision BA of Division 3 of Part III of the Act. That Subdivision has for a heading: "Trading Stock Valuation Adjustment". It is provided by s. 82B (1) that in that Subdivision, unless the contrary intention should appear -

"'trading stock', without extending or limiting by implication the meaning of that expression for any purpose of this Act other than the application of this Subdivision, includes livestock (other than livestock to which paragraph (f) applies) but does not include -

(a) land or an interest in land;

(b) shares in, or debentures of, companies;

(c) bonds, debentures, stock or other securities issues under an Act;

(d) bonds, debentures, stock or other securities issued by -

(i) a State;

(ii) a Territory;

(iii) a municipal corporation, other local governing body or public authority constituted by or under an Act or by or under a law of a State or Territory; or

(iv) the government of another country or an authority of such a government;

(e) choses in action; or

(f) animals (including birds and fish) for use in, or in connexion with, sporting or recreational activities or to be kept as pets or to be kept for other domestic purposes."

In s. 6(1) of the Act it is provided that in "this Act, unless the contrary intention appears . . . . 'trading stock' includes anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange, and also includes live stock".

The "prescribed percentage" by reference to which deduction is measured by s. 82D (1) is so defined as to reflect increase in monetary value of an assortment of goods sold by retail in the six State capital cities and, it was said, thus to reflect decrease in the value of money in Australia. Section 82B (5) provides:

"For the purposes of this Subdivision, the value of an article of trading stock at any time is -

(a) if the value of the article at that time, as ascertained under Subdivision B of Division 2, has been or will be taken into account under section 28 in ascertaining whether a person has a taxable income - the value that has been or will be so taken into account or the cost price of the article, whichever is the less; or

(b) if the value of the article at that time has been or will be included in the assessable income of a person under section 36 or 37 - the value that has been or will be so included."

The respondent's business was at all material times that of a dealer by wholesale in new Holden motor cars and its only customer was a retail dealer in cars of that brand, Suttons Motors (Chullora) Pty. Ltd., which was the beneficial owner of all the issued shares in the capital of the respondent. The respondent received the new cars from General Motors-Holden's Sales Pty. Ltd., from which those cars were ordered. But payment was made of the price on delivery not by the respondent, but by General Motors Acceptance Corporation, Australia (G.M.A.C.), pursuant to an agreement with that company. And the price was charged not by General Motors-Holden's Sales Pty. Ltd., but by an associated company named General Motors-Holden's Pty. Ltd.. At the same time of delivery a charge was made by General Motors-Holden's Sales Pty. Ltd. to Suttons Motors (Chullora) Pty. Ltd. in respect of the services it had rendered in procuring delivery of the car and in otherwise playing its part in performance of the web of contractual arrangements and business understandings which sustained the relationships between a retail dealer (or, as in this case, several legal persons who co-operated to deal) in new Holden motor cars and the several legal persons who co-operated to manufacture and to sell and to finance the wholesale and retail purchase of such cars. This charge also was paid, on delivery of a car to the respondent, to General Motors-Holden's Sales Pty. Ltd. by GMAC, which thereafter allowed, to the respondent and its parent company respectively, credit in respect of the price and the charge until a retail sale of the car had been made by the parent company. These arrangements are called a "floor plan", and were said to be common in the trade of selling motor vehicles.

The evidence established that the transactions between GMAC and the respondent with respect to the new cars claimed by the respondent to have constituted its trading stock on hand on 1 July 1976 were governed by an agreement in writing between those two companies called a "Dealer Wholesale Master Agreement". The following clauses of that agreement (in which "Owner" signifies GMAC and "Dealer" means the respondent) should be noticed:

"1. If the Owner shall at any time cause to be delivered to the Dealer any product and its accessories (hereinafter called "the product") the Dealer shall for all purposes whatsoever be deemed to have received such product upon and subject to the terms and conditions set forth in this Agreement and not otherwise.

2. The Hiring Amount for each product shall be the amount shown on the Dealer's Delivery Advice in respect of that particular product.

3. The Dealer shall on or before delivery of the product pay to the Owner the down payment (if any) specified on such Advice aforesaid and shall also pay the hiring amount also thereon specified at the times and in manner likewise specified.

4. All hire shall be payable without previous demand and shall be deemed to accrue from day to day from the Date of Delivery shown on said Advice.

10. On delivery and at all times during the hiring the product shall be at the Dealer's risk in all respects and he shall be responsible for all loss or damage thereto however caused. The Dealer shall notify the Owner forthwith of any loss or damage to the product or if it is taken out of his possession or control.

11. During hire the Dealer shall keep the product in his sole possession or control and free from liens or charges and shall not sell sublet transfer dispose of or part with the possession or control of it or any interest or benefit therein or in this agreement or attempt so to do. The Dealer shall forthwith notify the Owner of any change of his address.

13. If during the hiring the Dealer shall make default in punctual payment of any sums payable hereunder in respect of the product or of any other sum whatsoever owing to the Owner or should the Dealer die or should the product be taken out of his place of business or control or should he change his place of business without notifying the Owner or should the Dealer give a bill of sale of his effects or in case the Dealer be a company should an order be made for the winding up of the company or should the company go into voluntary liquidation or should a receiver be appointed in respect of any of the effects of the Dealer or should the product be seized under any execution or legal process issued against the Dealer or should the Dealer fail to observe or fulfil any agreement or condition herein contained or in the event that the Owner deems itself insecure or said product in danger of misuse loss seizure or confiscation the Owner shall be entitled to immediate re-delivery of the product and may simultaneously therewith or at any time thereafter by notice to the Dealer determine the hiring but without prejudice to any of the rights of the Owner hereunder and the Owner or its agent take possession of the product with additions and alterations. . . .

14. The Dealer may at any time terminate the hiring by returning the product to the Owner in the condition in which it should be under this Agreement.

15. Upon payment of the said hiring amount at the times provided, the billing of General MotorsHolden's Sales Pty. Limited including deferral charge (if applicable) and all other moneys whatsoever owing by the Dealer to the Owner and if the Dealer has performed all his agreements hereunder he shall become the owner of the product but until such event the product shall remain the exclusive property of the Owner.

16. Receipt by the Owner of any promissory note or other negotiable instrument for any moneys payable under this Agreement shall be regarded as collateral only and notwithstanding discount or negotiation thereof shall not be deemed payment until met by the Dealer and the rights and powers of the Owner shall not be affected by any such receipt.

17. For the purpose of sales tax (if applicable) and without prejudice to the provisions of Clauses 15 and 16 aforesaid it is declared that the product shall be deemed to have been sold on the day of the receipt by the Owner of the amount required under the provisions of the said Clause 15 to entitle the Dealer to become the owner thereof notwithstanding that any instrument given in respect of the payment by the Dealer may not have then been met. Provided that if before such receipt by the Owner the Dealer shall have bona fide delivered the product to the end user thereof the date of sale shall be the date of such delivery. The date of registration of the product (if applicable) shall be regarded as the date of delivery to the end user."

Although clause 4 contemplates a charge measured by the effluxion of time, the evidence established that the parties treated the aggregate of the price payable by the appellant and the fixed charge payable by its parent company as the "hiring amount" to which reference is made in clauses 2 and 3. (No "down payment" such as clause 3 contemplates was required.) The "Dealer's Delivery Advice", to which reference is made in clauses 2 and 3, specified that aggregate sum as the "hiring amount", while the invoice in respect of a new car delivered to the respondent consisted of two detachable parts, one of which specified the price as having been charged to GMAC on account of the respondent and the other of which specified the charge as having been charged to GMAC on account of Suttons Motors (Chullora) Pty. Ltd.. If any payment made to GMAC was measured by effluxion of the time during which GMAC allowed credit in respect of a car to those two companies, the payment was made by the parent company and was not recouped by that company from the respondent and did not constitute any part of that which is called in clauses 2 and 3 the "hiring amount". An undertaking executed on behalf of Suttons Motors (Chullora) Pty. Ltd. included a promise to

"pay GMAC

(1) A charge at a rate per centum per annum established by GMAC and in force from time to time on the Hiring Amount specified on the Dealer's Advice of receipt of the particular product from the date of delivery shown thereon until the date of payment in full of the said Hiring Amount; such charge to accrue from date to day from the said Date of Delivery and to be payable without previous demand on the last day of each calendar month during the term of the hiring of the particular product by instalments of the amount which has accrued due on each date for payment or in such other manner as GMAC may from time to time require and

(2) Any other customary applicable GMAC charge. . ."

Notwithstanding the provisions of clauses 11 and 15 of the Dealer Wholesale Master Agreement, sales of cars of which possession had been taken by the respondent under that agreement were ordinarily effected by the respondent to Suttons Motors (Chullora) Pty. Ltd., and by the latter company to a customer, 24 hours before payment to GMAC of the "hiring amount". The established course of dealing between the two traders and GMAC was that Suttons Motors (Chullora) Pty. Ltd. paid to GMAC, within 24 hours of each retail sale, the "hiring amount", that is to say the aggregate of the price which the respondent owed and the charge which it owed itself in respect of the vehicle. The respondent re-imbursed its parent the price paid on its behalf.

The parties were not in disagreement that the principal reason for the interposition of the respondent in the trading between the companies which included the words "General Motors" in their names and Suttons Motors (Chullora) Pty. Ltd. was to ensure that liability to sales tax should not arise until immediately before retail sale of a new motor vehicle.

Mr. Graham Q.C., who appeared with Mr. N. Young for the appellant Commissioner, submitted that the new motor cars in the respondent's possession on 1 July 1976 under the provisions of the Dealer Wholesale Master Agreement were not trading stock of the respondent because the respondent had neither laid out money, nor incurred any obligation, in exchange for a right to pass the ownership of any of the cars to another. It was submitted that judicial exposition and accounting theory demonstrated the interdependence of the two notions, first that trading stock entries are made in a trading account the better to measure the gain which the future service potential of the trading stock confers on the business entity and, second, that the gain so measured, no less than the gain measured by a comparison of sales and purchases in that account, is a gain against costs. Where there is no cost, either by payment made or by liability incurred, there can be no gain, it was submitted, nor any loss, in respect of the increase or decrease during the year of income of a trader's stock of goods on hand for sale. Such a stock of goods for sale does not answer the description of trading stock, in the submission of counsel for the Commissioner, because mere possession of it by a trader does not at all influence that balancing of loss against gain during a defined period which it is the object of a trading account to achieve. The conception expressed by the words "trading stock" has no raison d'etre in accounting theory or, the submission would add, in the Income Tax Assessment Act 1936, but to enable a more accurate - a more realistic - balancing of the losses and gains of the period. A stock of goods the possession of which affects that balance not at all is outside the conception and therefore ought not, it was said, to be considered to be within the meaning of the expression "trading stock" in s.82D(1), or in Subdivision B of Division 2 of Part III of the Act.

At all material times the respondent brought to account as an expense in computation of its gross profit, and as a deduction from gross income in its income tax return, the aggregate price of the new motor vehicles delivered to it by General Motors-Holden's Sales Pty. Ltd. during the year of income; and the respondent allowed its stock of new motor vehicles on hand no value in its balance sheet, for it always sold for the price at which it had bought plus an amount equal to the amount of the liability to sales tax which it incurred by reason of the sale and it showed the asset value of the stock at cost as reduced to nil by a liability to GMAC for the aggregate price of the stock. The respondent's books of account were kept in accordance with the same assumptions: a liability for the price of a new motor vehicle was acknowledged upon delivery of the car to the respondent by crediting an account entitled "Notes payable GMAC" and by debiting an account entitled "Stock-new cars" with the amount of the price; balancing entries made at the time of sale of the car to Suttons Motors (Chullora) Pty. Ltd. recorded discharge of the liability to GMAC. The evidence was that the proleptic acknowledgment in account of the liability to GMAC did not ever result in accounting embarrassment because the respondent never exercised the right, conferred by clause 14 of the Dealer Wholesale Master Agreement, to deliver a car to GMAC and thereby to determine the hiring of the car.

The Commissioner, on whose behalf the submission was made that no deduction was allowable, in the ascertainment of the respondent's taxable income, in respect of the price of a car until the repsondent sold the car to Suttons Motors (Chullora) Pty. Ltd., did not in assessment disallow or in any way disturb or adjust the deductions claimed, in the profit and loss account which was included in the respondent's return, under s. 28 (3) and s. 51 of the Act. The deduction claimed under each of those provisions was calculated - just as the respondent's accounts were cast - on the basis that liability to pay the price was incurred by the respondent when it took possession of the car, not when it sold the car. The legal analysis of the respondent's trading transactions to which the submissions on the Commissioner's behalf gave expression was apparently allowed an influence in assessment only when the Commissioner was giving consideration to the claim to a deduction under s. 82D (1).

The major premise of the submission on behalf of the appellant Commissioner - that the measurement in account of fluctuation in trading stock value between the beginning and the end of an accounting period is undertaken in order the more accurately to evaluate the profit or the loss of the period - has long been judicially accepted as sound and as relevant to the legal conception of what is profit and what is loss of a business undertaking: see St. Hubert's Island Pty. Ltd. v. Federal Commissioner of Taxation (1976) 76 A.T.C. 4080 at 4084-4092, per Mahoney J., and the cases there cited.

Upon the question whether the cars could be regarded as trading stock, for the purposes of subdivision B of Division 2 of Part III of the Act or of Subdivision BA of Division 3 of that Part, from the time of delivery to the respondent, it might be possible to say that, even if the cars remained outside the conception of trading stock which the principles of commercial accounting afford until, at the time of sale to Suttons Motors (Chullora) Pty. Ltd., a liability to GMAC was incurred to pay the price of the car, yet from the time of delivery to the respondent the cars were within the meaning of the statutorily defined expression "trading stock" : that is, they were something "acquired", although not yet purchased, "for the purposes of . . . sale". Upon delivery of a car in pursuance of the Dealer Wholesale Master Agreement the respondent acquired, not only a right to possession of the car, but also a right to acquire or pass to another title to the car. The price payable in exchange for exercise of the right - the "hiring amount" - was specified at the time of delivery, on the "Dealer's Delivery Advice". It was a right defeasible only upon the occurrence of events specified in the Dealer Wholesale Master Agreement. It might be said that by obtaining those rights and possession of the car the respondent "acquired" the car, within the meaning of that word in the definition which s. 6 (1) of the Act provides of "trading stock". And the evidence established that each of the cars had been obtained "for the purposes of . . . . sale". Mason J. has pointed out, in Federal Commissioner of Taxation v. St. Hubert's Island Pty. Ltd. (1978) 138 C.L.R. 210 at 228, that -

"some accounting principles and practices which have been held to be appropriate in the ascertainment of a taxpayer's profit may have no application here because our statutory provisions specifically instruct us as to what constitutes assessable income and as to the items that shall be allowed as deductions from that income. The trading stock provisions contained in ss. 28 to 36 are a case in point. Accounting principle and practice cannot prevail over them."

Because the statutory definition is expressed to be inclusive, something that is "trading stock" according to the ordinary meaning which commercial usage has assigned to the expression will be held to be trading stock for the purposes of the Act, as Mason J. immediately observed. But something which the definitional words comprehend may also have to be held to be "trading stock" for those purposes, notwithstanding that commercial usage had not brought it within the ordinary meaning of the expression.

There seems no sufficient reason to adopt for the purposes of the trading stock valuation adjustment provisions any different construction of the expression "trading stock". Expressions and conceptions of Subdivision B of Division 2 have been utilised in Subdivision BA of Division 3.

Upon the question whether a new car in the respondent's possession under the Dealer Wholesale Master Agreement and not sold to Sutton's Motors (Chullora) Pty. Ltd. on 1 July 1976 was within the ordinary meaning of trading stock which commercial usage supplies, the affirmative evidence was uncontradicted and substantial. The evidence concerning accounting theory by reference to which the usage might be approved was also unanimous. Mr. Graham submitted that a critical analysis of that theory demonstrated that description of the cars as trading stock was necessarily in contradiction of the theory by reference to which the witnesses accorded the cars that description. I do not think that any error was demonstrated in so much of the theoretical reasoning as assigned the cars a "service potential" or a "future benefit": the respondent had possession and it had the owner under a legal obligation to pass the ownership at a specified price at a future time to be selected by itself. To the criticism that the conception of trading stock is of accounting relevance only as a means of balancing gain against expense and that here there was no expense - or no significant and relevant expense - in respect of the service potential which the respondent had gained by its rights in relation to the cars, the answer of the expert witnesses was that in accountancy theory substance is to be preferred to form and that the commercial reality of the transactions concerning the cars was - as other evidence also suggested - that the respondent came, upon receipt of each car, under a business obligation, inescapable in all circumstances except upon cessation of its business, to pay the price of that car as it was sold. Since it is a fundamental assumption of the theory in accordance with which trading stock entries are made in trading accounts that the trade will continue (the "going concern" assumption), inclusion in such an account of the price payable to GMAC of each new car on hand at 1 July 1976 as the "cost price" of that car as an item of trading stock then on hand was consonant with accounting theory, according to the evidence.

I would find, as Tadgell J. found, that the cars were trading stock in ordinary commercial parlance.

It was submitted on behalf of the appellant that the Act manifested an intention that, unless the "cost price" of an article for the purposes of Subdivision B of Division 2 at the end of a year of income was allowable under s. 51 of the Act as a deduction from the assessable income of that year, or had been so allowable in an earlier year, the article was not within the meaning of the expression "trading stock" in that Subdivision, or in Subdivision BA of Division 3. To suppose the contrary, it was said, was to admit incongruities in the operation of the several provisions of the Act in Divisions 1 and 2 thereof which a consideration of the whole of those provisions showed that the legislature could not have intended. Examples of suggested incongruity were examined by reference to the primary submission on the Commissioner's behalf, that Subdivision B of Division 2 can have no function but to aid in the comparison of gain and loss in trade during a particular period of time.

I need express no opinion whether, as was submitted by Mr. Graham, the amount payable to GMAC in the event of a sale by the respondent of a car delivered to the respondent during the year ended 30 June 1976 which was on hand on 1 July 1976 was not deductible, by virtue of s. 51, from assessable income of the year ended 30 June 1976: whether, on delivery to the respondent, an outgoing in that amount was incurred. If no such a deduction was allowable under s. 51, the suggested incongruity does not lead me to think that a different construction ought to be adopted to that which allows within the meaning of "trading stock" the cars which are the subject of this appeal. Incongruity of that kind is a not unfamiliar, and as I think an acceptable consequence of the provisions of the Act. I think myself obliged by the reasoning of the members of the High Court in Federal Commissioner of Taxation v. St. Hubert's Island Pty. Ltd. (1978) 138 C.L.R. 210 to accept as within the meaning of the words "trading stock" in those two Subdivisions an article which is within the ordinary meaning of those words.

I would dismiss the appeal with costs.