Commissioner of Taxes (Vic) v Melbourne Trust Limited

[1914] UKPCHCA 5

18 CLR 413

Income ex-Company-Profits-Company formed to realize assets of companies in

liquidation-Surplus proceeds of realization-Business of company-Income Tax Act 1903 (Vict.) (No. 1819), sec. 9.

Three assets companies were formed in England in December 1897 to carry out schemes of arrangement of the affairs of three Victorian banking com- panies then in course of liquidation in England and Victoria. In each case provisional agreements had been made with the sanction of the Courts in England and Victoria. The basis of each scheme was that the whole of the assets of the banking company should be handed over to a company to be formed for the purpose of carrying it into effect. The creditors of the respective banks were to accept, in full satisfaction of their claims, shares and debenture stock in the respective assets companies. The objects of each assets company were stated in its memorandum of association to be (inter alia) Present-Earl Loreburn, Lord Dunedin, Lord Atkinson, Lord Sumner, Sir Joshua Williams, and Sir Arthur Channell.

18 CLR 414

to carry out the provisional agreement; to acquire, take over and carry on the undertaking, property and assets of the banking company, and to issue the shares and debenture stock provided for in the agreement; and "to carry on the business of an assets company in all its branches, to nurse, use, employ, manage, develop and liquidate for such time and to realize at such time or times and in such manner as may be deemed expedient, all property of every (VICTORIA)

description including debts, claims, and demands which may at any time come into the hands of the company." The form adopted in the provisional agreements embodying the schemes was that the banking companies and their liquidators should respectively "sell and transfer" to the assets companies all the assets of the banking companies " in consideration whereof" the assets companies were to issue the debenture stock and shares. The values of the assets taken over by the respective assets companies were entered in their books according to valuations made by the liquidators of the banking com- panies respectively. The conditions of the issue of the debenture stock of each assets company authorized the redemption of it by purchase from the holders at a discount, or by distribution of money amongst the stock holders pari passu. No dividends were payable until all the stock had been redeemed. The three assets companies, which under the several schemes of arrangement were managed by the saine body of persons, proceeded to realize their respective assets, and by the beginning of 1903 all the debenture stock had been redeemed out of the proceeds, and a large quantity of property still remained unsold. In 1903 the respondent company was formed in England with the objects, as stated in its memorandum of association, of carrying out three several draft agreements made respectively with the three assets companies, Each of those agreements provided that the assets company should ' sell," and the respondent company should "purchase," the undertaking of the assets company and all its assets in consideration (inter alia) of shares and debenture stock of the respondent company. The memorandum of association of the respondent company also included the following purposes:- To nurse, use, employ, manage, develop and liquidate for such time and to realize at such time or times and in such manner as may be deemed expedient, all property of every description, including debts, claims and demands which may at any time come into the hands of the company" "to carry on the business of an estates development and assets company in all its branches."

Held, that the respondent company was a trading company, and that any surplus ascertained and realized of the proceeds of the assets of the assets companies over the consideration paid by way of purchase money for them, after making all just deductions, would be profits of the respondent company under sec. 9 of the Income Tax Act 1903, and taxable accordingly.

Decision of the High Court: Melbourne Trust Ltd. v. Commissioner of Taxes (Victoria), 15 C.L.R., 274, reversed.

APPEAL from the High Court.

This was an appeal by the Commissioner of Taxes for Victoria

18 CLR 415

to the Privy Council from the decision of the High Court Melbourne Trust Ltd. v. Commissioner of Taxes (Victoria) 1.

The judgment of their Lordships was delivered by

LORD DUNEDIN. The Commissioner of Taxes for the State of Victoria assessed the respondent company for income tax in respect of the year 1910 upon the sum of £113,998, being the sum which in his judgment, upon the figures appearing in the balance sheet and report of directors of the said company dated 9th April 1910, fell to be assessed under the Income Tax Acts. The respondent company objected to the assessment in SO far as it was levied upon the sums of £104,782 1s. 4d. and £509 1s., which sums were admittedly included in the above-mentioned sum of £113,998. What these sums were in respect of which objection was taken will be presently explained. The Commis- sioner of Taxes, at the request of the respondent company, stated a special case for the opinion of the Supreme Court of Victoria [In re Income Tax Acts 2].

The questions for the opinion of the Supreme Court as put "1 Whether the surplus of £104,782 1s. 4d. mentioned in pars. 19 and 22 of this case is profits earned in or derived in or from Victoria by the new company during the year 1909 or previous years within the meaning of sec. 9 of Act No. 1819 SO as to subject the new" i.e., the respondent "company to income tax in respect thereof

(2) Whether the difference of £509 1s. between the prices of debenture stock and par mentioned in pars. 19 and 22 of this case is profits of the kind mentioned in Question 1

The Supreme Court, by a majority of two to one, decided in favour of the Commissioner of Taxes, answering the questions put as follows :-

1The surplus of £104,782 1s. 4d. mentioned in pars. 19 and 22 of the said case is profits earned in or derived in or from Victoria by a company during the year 1909 or previous years within the meaning of sec. 9 of Act No. 1819 SO as to subject the company to income tax in respect thereof. 2(1913) V.L.R., 196 34 A.L.T., 17. 115 C.L.R., 274. 18 CLR 416

(2) The difference of £509 1s. between the prices of debenture stock and par mentioned in pars. 19 and 22 of the said case is also profits of the kind above mentioned SO as to subject the company to income tax in respect thereof."

Appeal was taken to the High Court of Australia [Melbourne (VICTORIA)

Trust Ltd. v. Commissioner of Taxes (Victoria) 1], and that Court by a majority of two to one reversed the judgment of the Supreme Court of Victoria, and in lieu of the order pronounced by that Court declared "that neither of the sums mentioned in the said questions is taxable."

From this judgment appeal is taken to their Lordships' Board. It appears from what has been above stated that judicial opinion on the question has been strongly divided-three learned Judges in all having been of one opinion and three of another. In such a state of matters it is not to be expected that the ques- tion should be one of easy solution, or that cogent arguments should not be found on both sides. Their Lordships recognize that fact, and have given careful and repeated consideration to the arguments addressed to them, and to the reasons put for- ward for their judgments by the learned Judges of the Courts below. They will now state the result at which they have arrived.

To make the question intelligible it is necessary here to give as briefly as may be a history of the occurrences which led to the point arising.

Three Australian banks, viz., the English and Australian Mort- gage Bank Ltd., the Federal Bank of Australia Ltd. and the City of Melbourne Bank Ltd., were unable to satisfy their creditors, and went into liquidation. The shareholders had virtually no interest in the liquidations, as the assets were avowedly insufficient to pay the creditors. Eventually in 1897 schemes of arrangement were sanctioned by the High Court in England and the Supreme Court in Victoria, and in the case of the second bank also by the Courts of New South Wales and South Australia. In the case of each bank the scheme as affect- ing it sanctioned in England was identical with that sanctioned in Australia. In pursuance of the schemes of arrangement three

115 C.L.R., 274. 18 CLR 417

companies were formed bearing the names of the English and Australian Assets Co. Ltd., the Federal Assets Co. Ltd. and the Melbourne Assets Co. Ltd. respectively. In these companies the creditors of the respective banks were to receive in respect of their debts SO much debenture stock and ,SO many fully paid-up shares. The whole assets of each of the insolvent banks were transferred to the respective companies, and the liquidation of the banks was brought to an end.

The respective assets companies then proceeded gradually to realize the assets, and with the proceeds to pay off the debenture stock, it being by the terms of its creation a redeemable stock. During the whole of the life of these companies the shares and debenture stock were transferable, and some of the stock and shares were in fact-but to an extent not accurately known- transferred.

By the year 1903 the whole of the debenture stocks had been redeemed.

In 1903 the respondent company was formed.

The object of the company was to acquire the undertakings of the three separate companies in terms of agreements which had been made by the promoters of the respondent company with the three companies. In terms of these agreements the whole of the assets of the three respective companies were to be handed over to the new company; the three companies were to be wound up, and the shareholders of the respective companies were in exchange for their shares to receive in the case of the Melbourne Assets Co. and the English and Australian Assets Co., cash, debenture stock, and shares in the case of the Federal Assets Co., deben- ture stock and shares, all calculated at the rates set out in the said agreements. This was done. The respondent company then proceeded with the gradual realization of the massed assets, and applied various sums of the moneys SO received in paying off its debenture stock. This was effected partly by buying their own stock in the market, and partly by redeeming the same, it being by the terms of its issue a redeemable stock. By 15th October 1909 the whole of its debenture stock was paid off.

Their Lordships must now refer to the report and balance

18 CLR 418

sheet of 9th April 1910, upon the terms of which the questions as put arise.

The balance sheet is preceded by a profit and loss account. This account is framed on the ordinary lines of the profit and loss account of a going concern, and deals solely with the yearly (VICTORIA)

revenue, deducting outgoings and expenses of the properties held by the company. It brings out a profit balance of £25,183 18s. 2d. to be carried to the balance sheet. But it takes no account whatever of sums received from assets realized.

Coming to the balance sheet we find on the liabilities side shareholders' capital and creditors and sundry other liabilities stated in ordinary form. We then come to the following item, which is the matter for special attention:-

"Realization Reserve Account.-Net surplus on realization to date (see par. 5 of Directors' Report), £144,765 9s. 8d.

Discount on purchases and cancellation of debenture stock, £3,943 5s. 6d."

Then these two figures are summed and brought out at £148,708 15s. 2d.

Turning now to the report, there are to be found the following passages :-

"5. As the result of the year's operations the Realization Reserve Account (consisting largely of purchasers' balances) has been increased by the sum of £47,442 15s. 5d., making, with the amount brought forward from the previous year, a net surplus of £148,708 15s. 2d. on realizations and profit arising on purchase of debenture stock for cancellation."

"7. In the Profit and Loss Account no credit has been taken for accrued interest, rents, or dividends of an estimated amount of £4,150. After providing £1,855 8s 3d., for interest paid on the debenture stock, the net profit, including the balance brought for- ward from the previous year, £2,149 15s. 5d., is £27,333

The directors recommend that from this sum

there be applied in payment of a dividend of fourpence per share (equivalent to slightly over 8 per cent.) free of income tax Leaving to be carried forward (subject to pay-

ment of income tax)

18 CLR 419

The whole of the debenture stock having been paid off and the share capital of the company, without taking into considera- tion the Realization Reserve Account, being fully represented by assets, the directors also recommend to the shareholders that a distribution by way of bonus of sixpence per share should be paid in cash out of that account.

The sum at credit of the Realization Reserve The bonus now recommended amounts to Leaving at the credit of the Realization Re-

serve Account

£114,542 2 2." It is set forth in the special case that the assets of the three respective companies as taken over were entered at a valuation in the company's books, which reproduced a valuation made by the companies themselves four years before the transfer to the new company. As any individual asset came to be realized the difference between the actual price realized and the figure at which that asset stood was, if it were a gain, carried to a Realiza- tion Reserve Account. It is also set forth that of the sum of £148,708 15s. 2d., mentioned in par. 7 of the report as above set forth, the sum of £104,782 1s. 4d. represents surplus on realiza- tion of assets in Victoria, and £509 1s. represents the difference between prices paid and par for their own debenture stock in Victoria.

It is not necessary to set forth the particular provisions of the Income Tax Acts in force in Victoria. It is common ground that a company, if a trading company and making profit, is assessable to income tax for that profit. The argument for the respondent company can be stated in a single sentence. They say they were not a trading company but a realization company; that the realization was truly for the benefit of the original creditors of the three banks; that all shareholders in the company are either such original creditors or the assignees of such original creditors. If that is the true view of the situation their Lordships do not doubt that the argument must prevail. If the liquidator of one of the banks had made an estimate of the various assets held by him for realization, and then on realization had obtained more

18 CLR 420

than that estimate, such surplus would not have been profit assessable to income tax.

Their Lordships cannot, however, come to the conclusion that that is the true view of the situation. It is not necessary to decide the question as it might have arisen in the case of the (VICTORIA)

original three assets companies. At least at the inception of the present company it seems to their Lordships that all concerned were satisfied to discharge their old claims by accepting shares in a new venture, and that that new venture must then be looked at to see if profits assessable to income tax have been earned. The position may be tested in more ways than one. Were it a case of liquidation, then the directors of the company would hold for the creditors of the old insolvent banks. They do not do SO. They hold for the shareholders of the company; and the shareholders of the company comprise persons who never were creditors of the banks, but who acquired their shares in open market. Again, if it was liquidation, the right of each participant creditor, or creditor's assignee, would be strictly limited to the assets of the bank of which he was a creditor or represented a creditor. If, for example, the Melbourne Bank assets on realiza- tion turned out well, and the Federal Bank assets badly, the creditors of the one would benefit, and those of the other suffer. But as it is, it is not SO. Each shareholder has in respect of each share an equal interest in the proceeds of the massed assets which were originally assets of the three banks but now are assets of the company. Holding, then, that the shareholders of this company are shareholders in an ordinary venture, the only question that remains is whether the surpluses realized represent profits. Their Lordships think that the principle is correctly stated in the Scottish case, California Copper Syndicate V. Harris 1 It is quite a well settled principle in dealing with questions of assessment of income tax, that where the owner of an ordinary investment chooses to realize it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to income tax. But it is equally well established that enhanced values obtained from realization or conversion of

16 F., 894 5 Tax Cas., 159. 18 CLR 421

securities may be SO assessable, where what is done is not merely a realization or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business."

In the present case the whole object of the company was to hold and nurse the securities it held, and to sell them at a profit when convenient occasion presented itself.

Their Lordships therefore come to the conclusion that there is ample evidence here that the company is a trading company, and that the surplus realized by it by selling the assets at enhanced prices is a surplus which is taxable as profit.

There remains, however, a difficulty as to proof of the exact figure. It does not seem to their Lordships that the mere fact that an investment standing in the books at x pounds realizes on sale x + y pounds settles that a profit of y pounds has been made. It is not that their Lordships doubt that the initial figure in the books may be taken. These figures represent, in their Lordships' view, real values, for SO the parties have treated them. It was argued that they were mere valuations. In one sense that is true, for, not being put to the test of the market at the moment, the only way to affix a value was by valuation. But that they represent real value seems certain because, unless they did, it would have been impossible to regulate justly the share which each member of the three assets companies was to get in the new mixed mass of assets-or, in other words, what shares and debentures he should get in the new company. But it is possible that other investments on realization may show loss instead of profit and it is obvious that it is in the totality of the transactions that the question of profit comes to be fixed.

Their Lordships are, however, of opinion that the company may well be held bound by its own actions. In distributing a bonus of 6d. per share it affirmed that to that extent at least there was profit realized. In the same way in making a distri- bution of debenture stock on and after 10th August 1910 they may be held to have distributed profit.

Sec. 9 1 of the Income Tax Act 1903 is as follows 9

1So far as regards any company liable to pay tax the income thereof chargeable with tax shall (except as provided in par. g of sub-sec. 1 of sec. 7 of the Principal Act or as hereinafter 18 CLR 422

provided) be the profits earned in or derived in or from Victoria by such company during the year immediately preceding the year of assessment."

This question of time does not seem to have bulked in the discussion in the Courts below-indeed the form of the question (VICTORIA)

" during the year 1909 or previous years" rather precludes it -but has been very earnestly pressed upon their Lordships' attention.

As regards the question of when a profit is earned, their Lord- ships' view is that a profit can be said to be earned when it is dealt with as a profit. In ordinary cases this synchronizes with the realization of the sums which swell the assets of the person or company, and which entering the account (whether on the creditor or debtor side will depend on the particular account in view) go to bring out the balance which is deemed profit. But for the reasons already given their Lordships think that in a case like this the company are entitled to hold at least a part of their realizations in suspense-as, indeed, they have done in their accounts-and that it is only when finally the same is given to the shareholders that the final impress of profit is, SO to speak, stamped upon it, and that therefore, for the purposes of the Act, that is the time at which it is earned.

Holding this view, their Lordships will humbly advise His Majesty to allow the appeal and set aside the judgment appealed against, and also the judgment originally passed by the Supreme Court, and remit the case to the Supreme Court with the following declarations:-

1. Declare that the respondent company is SO constituted and has SO carried on its affairs that any surplus ascertained and realized of the proceeds of the assets of the assets companies over the consideration paid by way of purchase money for them, after making all just deductions, would be profits taxable as income in the following year; this being over and above any annual surplus of incomings over outgoings of the concern.

2. Declare that as regards the bonus of 6d. per share referred to in par. 7 of the Directors' Report of 9th April 1910 there is evidence sufficient to show that this is taxable as profit SO far as it was earned in or derived from Victoria; and that pari ratione

18 CLR 423

the distribution of debenture stock to shareholders calculated as justified by the state of the Realization Reserve Account should be properly held to be taxable as profit according to the pecuniary value thereof.

3. Declare that the case does not state facts sufficient to deter- mine any other questions either as to the amount of the profits, or the years in which they are assessable.

4. Declare that the Commissioner be at liberty to apply to the Supreme Court for any inquiries and accounts that may be necessary.

5. Declare that neither party shall be entitled to costs. There will be no costs to either party before this Board.

[HIGH COURT OF AUSTRALIA.] NEILSON

THE MINISTER OF PUBLIC WORKS

FOR NEW SOUTH WALES

ON APPEAL FROM THE COMMISSIONER OF PATENTS. Patent-Specification-Amendment- - Want of subject matter-Substantially different

invention-Patents Act 1903 (No. 21 of 1903), secs. 71, 78.

On an appeal from the refusal of the Commissioner of Patents to allow certain amendments of a specification,

Held, that the amendments were properly disallowed: By Barton J., on the ground that, whether the invention claimed in the proposed amendments of the specification was the discovery of a new principle or a mere working direction for the use of existing apparatus, it was sub- stantially different from that claimed by the original specification, and there-