Investment and Merchant Finance Corporation Ltd v Federal Commissioner of Taxation

[1971] HCA 35

HIGH COURT OF AUSTRALIA

Barwick C.J., McTiernan, Menzies and Walsh JJ.

INVESTMENT AND MERCHANT FINANCE CORPORATION LTD. v. FEDERAL COMMISSIONER OF TAXATION

(1971) 125 CLR 249

18 August 1971

Income Tax (Cth)

Income Tax (Cth)—Assessable income—Trading stock—Shares—Purchase in course of dividend-stripping operation and ultimate sale—Loss or outgoing—Purchase price of shares—Capital or income—Business—What amounts to—Profit-making undertaking or scheme—Whether purpose profit-making or obtaining taxation benefit—Whether receipt of dividend forms part of undertaking or scheme—Double taxation—Rebate on dividend paid to company shareholder—Income Tax Assessment Act 1936-1965 (Cth), ss. 6, 25, 26 (a), 28, 29, 31, 46, 51, 52.

Decisions

The following written judgments were delivered:-
BARWICK C.J. The facts and circumstances relating to this appeal are to be found in the judgment of my brother Windeyer against which the appeal is brought (1970) 120 CLR 177 and in the reasons for judgment of other members of the Court. The appellant in the course of and as I think as part of its business as a dealer in shares bought certain shares for a total price of 86,504 pounds Os.Od. The company whose shares were thus bought in the month following the appellant's purchase declared and paid a dividend to its shareholders which brought to the appellant the sum of 81,900 pounds Os.Od. In the next tax year as that in which the shares were purchased the appellant sold the shares for a sum 86,483 pounds Os.Od. less than the sum paid for them. (at p254)

2. If as I think the purchase of the shares was part of the appellant's business as a dealer in shares neither the purchase nor the subsequent sale of the shares was part of a capital transaction. The cost of the shares was an outgoing of the appellant's business properly deductible under s. 51 of the Income Tax Assessment Act 1936-1969 (Cth) (the Act). Notwithstanding some expressions of judicial opinion in earlier cases, the shares purchased by the appellant, in my opinion, formed for the purposes of the Act part of the stock in trade of the appellant in its business of share dealing. Accordingly it was entitled for the purposes of the assessment of income tax to bring the shares to account at the close of the first of the two relevant tax years at their cost price, see s. 31. The dividend received by the appellant constituted assessable income by virtue of s. 44: but it was rebatable by virtue of s. 46. When the shares were sold in the second of the tax years, there was a loss. As I have indicated it was not a capital loss. I can see no answer to the proposition that that loss was properly regarded as a loss incurred in carrying on the business of share dealing and therefore deductible under s. 51. (at p254)

3. The Commissioner sought to avoid this consequence by asserting that the purchase and sale of these shares was outside the scope of the appellant's share trading business and ought to be regarded as an isolated transaction. I am unable to agree with this proposition. It is based apparently upon the supposition that because the appellant saw fiscal advantages in buying the shares cum-dividend and disposing of them ex-dividend at a diminished price the transaction could not be regarded as a transaction of share dealing in the course of its business as a dealer in shares: but quite clearly neither the attainment of profit nor the expectation of it is essential for a particular commercial transaction to form part of the business of dealing in the commodity purchased. As I have already indicated, the share transaction was effected in the course of and as part of the appellant's business as a share dealer. (at p255)

4. This conclusion in reality determines the fate of this appeal. However it was submitted by the Commissioner that the transaction fell within the terms of s. 26(a) and, that viewed as a separate transaction it yielded a smaller loss than that claimed by the appellant, the dividends received being regarded as part of the proceeds of the transaction viewed as a whole. But I am unable to accept this submission. (at p255)

5. In the first place it is an error in my opinion to think that the transactions of a business can be taken item by item and each treated as falling within s. 26(a). The business must be regarded as a whole, its receipts being assessable income from which the permitted deductions are to be deducted. Section 26(a) is intended in my opinion to deal with transactions which are entire in themselves and do not form part of a more extensive business. In that event they are regarded as yielding a profit which will be calculated according to the circumstances of the transaction, the profit only being assessable income. (at p255)

6. In the second place, my earlier conclusion that the transaction formed part of the appellant's business of trading in shares denies any basis for treating it as an isolated transaction to which s. 26(a) may apply. (at p255)

7. I have had the advantage of reading the reasons for judgment prepared by my brother Menzies and those prepared by my brother Walsh. I agree with the conclusions to which they have come and that this appeal should be allowed. (at p255)

8. In my opinion the appeal should be allowed. (at p255)

McTIERNAN J. This is an appeal from a decision of Windeyer J. dismissing an appeal by Investment &Merchant Finance Corporation Ltd. ("the taxpayer") against its assessment in respect of the year of income ended 30th June 1965. (at p255)

2. The taxpayer (which prior to 1967 bore the name of Devon Credits Ltd.) described itself at the relevant time as a "financier". This term encompassed the business of money-lending, underwriting and share-dealing, the latter both for investment purposes and for the purpose of profit from purchases and sales. The transaction in question involved shares purchased in the year of income ended 30th June 1964 in Macgrenor Investments Pty. Ltd. ("Macgrenor") (a private company) for 86,180 pounds 17s.Od. The shares purchased comprised twenty-one of the thirty ordinary shares issued in Macgrenor. The remaining nine shares were purchased by another company, the Investment Company of South Australia Ltd. In the same year Macgrenor declared a dividend which represented its accumulated profits available for distribution in this way to ordinary shareholders. The taxpayer thereby received 81,900 pounds. This sum was liable to tax under s. 44(1) of the Income Tax and Social Services Contribution Assessment Act 1936-1964 (Cth) ("the Act") but that tax was in fact rebatable pursuant to s. 46(2) of the Act. Events followed this course. As regards the shares themselves the question of tax did not arise for the year of income ended 30th June 1964 because the shares had come into the taxpayer's trading account at their cost price and stood there, for the purposes of tax liability, at that price on 30th June 1964, even though it was clear that they no longer retained anything like their original value at purchase. (at p256)

3. During the course of the year of income ending 30th June 1965 the taxpayer sold its twenty-one shares in Macgrenor to a company called Happy Venture Pty. Ltd. for the sum of 21 pounds, a difference, vis-a-vis the purchase price, of 86,482 pounds 17s.Od., if the stamp duty on the purchase is added. The result of this transaction was that the taxpayer's account showed an opening entry, with respect to the year of income ending 30th June 1965, for those shares of 86,503 pounds 17s.Od. and a closing entry of 21 pounds. The taxpayer claims that the difference of 86,482 pounds 17s.Od. is an allowable deduction. The Commissioner has refused to assess the taxpayer's tax on this basis. (at p256)

4. The primary submission for the taxpayer was that the shares in question were "trading stock" within the meaning of s. 6(1) of the Act and that therefore it was entitled to claim a deduction of 86,482 pounds 17s.Od. pursuant to s. 28(3) of the Act. Section 28(3) reads as follows:

"Where the value of all trading stock on hand at the beginning of the year of income exceeds the value of all trading stock on hand at the end of that year, the amount of the excess shall be an allowable deduction."

Section 29 and s. 31(1) deal with the computation of the value of trading stock and it was argued that these sections make it clear that if the shares in question be considered trading stock the taxpayer must be entitled to an allowable deduction under s. 28(3). (at p257)

5. It was submitted in the alternative by counsel for the taxpayer that the shares in question were not trading stock but an asset purchased for the purposes of a venture in the nature of trade and that the difference between the purchase and sale prices of the shares should therefore be an allowable deduction under s. 51(1) of the Act. Section 51(1) provides that:

"All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income."

It was argued that this was a loss incurred by the taxpayer in carrying on one of its businesses, in this case its business as a share dealer. (at p257)

6. Counsel for the taxpayer contended that this was a case in which s. 26(a) of the Act had no operation for the reason that it is not permissible for the Commissioner to take a taxpayer's course of business and extract from that course of business a single item which is then treated as falling under s. 26(a) rather than under s. 25, which will of course govern the rest of the taxpayer's transactions in his business. (at p257)

7. It was submitted for the Commissioner that, whatever might be the position with regard to shares as trading stock in other circumstances, these particular shares were not trading stock. It was argued that although the taxpayer was carrying on a business as a share trader the purchase of these shares was neither a part nor an incident of its ordinary share-trading business but an expenditure of capital with a view to obtaining a capital asset, with a result that their disposal at a loss involved no allowable deduction of the nature claimed by the taxpayer. The reason put forward for so classifying this expenditure was that the sole benefit of the transaction to the taxpayer lay in its production of a taxation advantage and this fact rendered the dealing one without a real commercial aspect and therefore either not a trading activity, or, at least, so far removed from the company's ordinary course of business, that it could not be considered part of that business. (at p257)

8. The alternative submission for the Commissioner was that the taxpayer's dealings amounted to a "profit-making undertaking or scheme" under s. 26(a), with a result that the dividend received in the previous year of income must be taken into account in computing any profit or loss under the scheme. Section 44(1), which makes the dividend assessable income in the year of income in which it is received, was said to be subject to s. 26(a) on the grounds that in the case of a profit-making undertaking or scheme it is necessary, in calculating whether there has been any taxable profit under s. 26(a) or any allowable deduction under s. 52, to take into account everything that was gained or lost during the course of carrying out the scheme. (at p258)

9. In my opinion it seems clear that the taxpayer would be entitled to a deduction under s. 28(3) if the shares in question fall within the definition of "trading stock". Section 6(1) of the Act defines "trading stock" thus:

"'trading stock' includes anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange, and also includes live stock."

In Australian Machinery and Investment Co. Ltd. v. Deputy Federal Commissioner of Taxation, Dixon J. (as he then was), with whom I concurred, said (1946) 8 ATD 81, at p 107 :

"As at present advised I am not prepared to hold that the shares were 'trading stock' within the meaning of Div. 2, Sub-div. B, ss. 28-31, though this does not necessarily mean that the principles of accounting embodied in those provisions are themselves altogether inapplicable."

In my opinion, whatever may be the general position with regard to shares held by a company trading in shares, these particular shares could not be considered as trading stock. This transaction was certainly not part of the taxpayer's normal trading business. In fact it was the only dealing of this type engaged in by the taxpayer during the period 1961-1968. I think it appropriate to quote the words of Lord Morris of Borth-y-Gest in Bishop (Inspector of Taxes) v. Finsbury Securities Ltd. (1966) 1 WLR 1402; (1966) 3 All ER 105; (1966) 43 TC 591 , where a dividend-stripping operation, similar in nature, if not in detail, to that in this case, had occurred. His Lordship said (1966) 1 WLR, at p 1417; (1966) 3 All ER, at p 112; (1966) 43 TC, at p 627 :

"A consideration of the transactions now under review leads me to the opinion that they were in no way characteristic of, nor did they possess, the ordinary features of the trade of share dealing. The various shares which were acquired ought not to be regarded as having become part of the stock-in-trade of the company. They were not acquired for the purpose of dealing with them. In no ordinary sense were they current assets."

and later at the same page:

"It was a wholly artificial device remote from trade to secure a tax advantage." (1966) 1 WLR, at p 1418; (1966) 3 All ER, at p 112; (1966) 43 TC, at p 627

It must also be remembered that the taxpayer did not treat the shares in question as trading stock in either of the returns lodged for the years of income ended 30th June 1964 and 30th June 1965. (at p259)

10. In my judgment the taxpayer's reliance on s. 51(1) of the Act does not avail it either. The section speaks of "losses and outgoings" which may be allowable deductions. Obviously the purchase price of these shares was not an outgoing in the relevant year of income. It would have of course been such an outgoing in the previous year of income: Rowdell Pty. Ltd. v. Federal Commissioner of Taxation (1963) 111 CLR 106 . The word "loss" raises, I think, notions of a want or a deficiency. As regards therefore the claim of a "loss" in the sum stated I consider that it is necessary in computing any such loss to take into account the dividends which the taxpayer received and which in this instance approximated to the "loss" claimed. In my opinion the Commissioner correctly thought that the only figure which reflected these concepts was that arrived at by taking the dividends received into account rather than that claimed by the taxpayer. (at p259)

11. In my opinion this transaction of the taxpayer falls within those words of s. 26(a) of the Act which make assessable income of a taxpayer "profit arising . . . from the carrying on or carrying out of any profit-making undertaking or scheme". Section 52 of the Act is therefore the provision which determines whether the deduction claimed by the taxpayer is allowable. Section 52 provides as follows:

"Any loss incurred by the taxpayer in the year of income upon the sale of any property or from the carrying on or carrying out of any undertaking or scheme, the profit (if any) from which sale, undertaking or scheme would have been included in his assessable income, shall be an allowable deduction: Provided that, in respect of property acquired by the taxpayer after the date of the commencement of this proviso, no deduction shall be allowable under this section (except where the Commissioner, being satisfied that the property was acquired by the taxpayer for the purpose of profit-making by sale or for the carrying on or carrying out of any profit-making undertaking or scheme, otherwise directs) unless the taxpayer, not later than the date upon which he lodges his first return under this Act after having acquired the property, notifies the Commissioner that the property has been acquired by him for the purpose of profit-making by sale or for the carrying on or carrying out of any profit-making undertaking or scheme."

Leaving aside for the present the question of whether, as the proviso to the section requires, the taxpayer notified the Commissioner that the shares had been acquired for a profit-making purpose or the Commissioner rendered such notification unnecessary by indicating his satisfaction on this point, the requirement that there be a "loss" again seems to me to defeat the taxpayer's claim. When the complete scheme (or operation, to use a less pejorative word) is examined in this case I do not consider that the taxpayer incurred a loss within the meaning of s. 52 in the year of income ending 30th June 1965. The taxpayer's method of book-keeping did portray such a picture but it is possible to achieve this impression only by disregarding almost completely the real value of the shares in question at the start of that year of income. (at p260)

12. In my opinion, therefore, the appeal should be dismissed. (at p260)

MENZIES J. The appellant taxpayer, which has at all times material been inter alia a dealer in shares, bought, in October 1963, twenty-one shares in Macgrenor Investment Pty. Ltd. for approximately 4,000 pounds a share. There were out-of-pockets in connexion with the purchase and the taxpayer's total outlay for the shares was 86,503 pounds 17s.0d. Macgrenor had large profits available for immediate distribution among shareholders and in November 1963 it declared and paid a dividend, of which the taxpayer received 81,900 pounds. In December 1964 the taxpayer sold its twenty-one shares in Macgrenor for 1 pound a share each. The effect of the foregoing, according to the taxpayer, was that in the year ended 30th June 1964 the outlay of 86,503 pounds 17s.0d. was a taxation deduction; the dividend of 81,900 pounds was rebatable under s. 46 of the Income Tax and Social Services Contribution Assessment Act 1936-1964 (Cth), and, in the year ended 30th June 1965, the difference between the purchase price of the shares, 86,503 pounds 17s.0d. and their selling price, 21 pounds, was a taxation deduction. (at p260)

2. Until the dividend had been received the shares, which had by virtue of the purchase become part of the taxpayer's stock in trade, were worth what had been paid for them. After the receipt of the dividend they were not. They were worth approximately the difference between the price paid and the dividend received, i.e. 4,607 pounds 17s.0d. In its taxation return for the year ended 30th June 1964 the taxpayer showed the dividend of 81,900 pounds and it showed the twenty-one Macgrenor shares which, in one place, were wrongly stated to have cost 3,250 pounds. Had the Macgrenor shares been shown in the taxpayer's commercial accounts for the year ended 30th June 1964 as worth what had been paid for them, the accounts would, of course, have been grossly misleading. To avoid this, what the taxpayer did was to write down their value by 82,931 pounds. In its income tax return, however, it added back the amount written off so that, for the purposes of the calculation of tax for the year ended 30th June 1964 (the Macgrenor shares having been shown in the commercial account as worth 3,250 pounds, arrived at as follows:

Cost Price (less 323 pounds stamp duty) : 86,180 pounds 17s.0d. Less Written Down : 82,930 pounds 17s.0d. Written Down Book Value : 3,250 pounds 0s.0d.)

there was added to the item net profit before taxation - as shown in the commercial accounts - the amount written off, i.e. 82,931 pounds. The consequence of this was that, for taxation purposes, the shares were treated as having cost 86,180 pounds 17s.0d. and as valued at that sum as part of the taxpayer's stock in trade on 30th June 1964, although then their true value was about 3,250 pounds . No doubt the justification for what was done was found in s. 31 of the Income Tax and Social Services Contribution Assessment Act 1936-1964 (Cth). Each share was presumably taken into account at the end of the year of income at its cost price, although in its own accounts the taxpayer took it into account at what was really market selling value. To this aspect of the matter I will return later. The point for present purposes is that the Macgrenor shares were bought for 86,503 pounds 17s.0d. and were, for taxation purposes, taken in stock on 30th June 1964 as valued at that amount. Accordingly, when they were sold for 21 pounds in December 1964 there was, so the taxpayer claimed, a loss of 86,682 pounds 17s.0d. The Commissioner, however, took a different view. He allowed as a deductible loss the sum of 4,583 pounds, being the calculated difference between the purchase price which the taxpayer had paid for the shares and the sum of the dividend received upon the shares, 81,900 pounds, and the price at which they were sold, 21 pounds. This assessment Windeyer J. upheld, and the appeal is from that decision. (at p261)

3. The learned Solicitor-General sought to uphold the assessment and the judgment in two ways. First, on the footing that the whole transaction was of a capital nature, so that the difference, between what was paid for the shares when purchased, and what was received for the shares when sold, was a capital loss and therefore not deductible. Alternatively, on the footing that the transaction, as a whole, was the carrying out of a profit-making scheme for the purposes of s. 26(a) of the Act, and that, in determining the profit derived from the scheme, the dividend received should be brought into account rather than being treated as itself assessable income in accordance with s. 44 of the Act. (at p262)

4. In advancing the first proposition the learned Solicitor-General did not deny that the taxpayer was a share dealer; his contention was rather that this particular transaction was outside its business as a share dealer and was of a capital nature. Of course, a dealer may enter into a transaction that does fall outside his income-producing business. Thus a company, which buys and sells land, might buy a building to occupy as its principal office so that the purchase price paid for it would be an outgoing of a capital nature. I have, however, found no basis here for excluding this transaction from the taxpayer's share dealing transactions. The learned trial judge clearly regarded it as falling within that business. In doing so he was, I think, correct. The taxpayer bought the shares intending to take the dividend and to sell the shares at their then market price. It was undoubtedly true that the attraction of the transaction lay in the concurrence of three features, namely, that the purchase price would be deductible from assessable income; that the dividend to be received would be rebatable and that the sale of the shares would result in a loss which would, it was expected, be deductible from other income of the year in which the loss was made. It seems to me, however, that this transaction was a transaction of a trading character. The decision of the House of Lords in Griffiths (Inspector of Taxes) v. J.P. Harrison (Watford) Ltd. (1963) AC 1; (1962) 1 All ER 909; (1962) 40 TC 281 supports this conclusion. In the later case of Bishop (Inspector of Taxes) v. Finsbury Securities Ltd. (1966) 1 WLR 1402, at pp 1416-1417; (1966) 3 All ER 105, at p 111; (1966) 43 TC 591, at p 626-627 , Lord Morris spoke of Harrison's Case (1963) AC 1; (1962) 1 All ER 909; (1962) 40 TC 281 in these terms:

"In that case there was a purchase of the shares in a company called Bendit Ltd. (afterwards called Claiborne Ltd.). The vendors of the shares had no interest in the shares thereafter. They had no prospect of receiving any benefit from any tax recovery. After the Harrison company owned the shares in Claiborne Ltd. there was a declaration of dividend on the shares. After that the shares were sold. It was my view in that case that the transaction was demonstrably a share-dealing transaction. Shares were bought; a dividend on them was received; later the shares were sold. There may action when deciding as to its nature. In the Harrison Case, (1963) AC1; (1962) 1 All ER 909; (1962) 40 TC 281 , my view was that there could be no room for doubt as to the real and genuine nature of the transaction. The fact that the reason why it was entered into was that the provisions of the revenue law gave good ground for thinking that welcome fiscal benefit could follow did not in any way change the character of the transaction. It was not capable of being made better or worse or being altered or made different by the circumstance that the motive that inspired it was plain for all to see." (at p263)

5. In Harrison's Case Viscount Simonds (1963) AC, at pp 11-12; (1962) 1 All ER, at p 912; (1962) 40 TC, at pp 293-294 had said:

"Here was a company whose object it was to deal in shares. It entered into a commercial transaction which, though it might be given an invidious name, contained no element of impropriety, much less of illegality. I can find nothing that enables me to say that it is not a trading transaction, and echo the question asked by the majority in the Court of Appeal: 'If it is not that, what is it?' No doubt, many observations that have been made alio intuitu will be found to the effect that trade is carried on with a view to a profit. This proposition, however, is not universally true, nor can it be tested merely by ascertaining the difference between the purchase price (or, it may be, the manufacturing cost) of an article and the selling price of that article. For a dealer may seek his profit, if a profit is essential, otherwise than by an enhanced price on a re-sale, as by a declaration of dividend, a repayment on a reduction of capital or on a liquidation of the company whose shares he has bought. It appears to me to be wholly immaterial, so long as the transaction is not a sham (as was the case in Johnson v. J.S. Jewitt (Inspector of Taxes) (1961) 40 TC 231 ), what may be the fiscal result, or the ulterior fiscal object of the transaction . . ." (at p263)

6. The expenditure incurred in buying the shares was, I have no doubt, in a sense a capital expenditure, but being, as I see it, "expenditure incurred . . . in the purchase of stock used by the taxpayer as trading stock" it is not to be deemed an outgoing of capital: Income Tax Assessment Act 1936-1965 (Cth), s. 51 (2). Accordingly, in my opinion, the judgment is not to be upheld upon the learned Solicitor-General's first submission. (at p263)

7. I come now to the learned Solicitor-General's second submission. I would not dispute that what the taxpayer did, in buying the I would not dispute that what the taxpayer did, in buying the shares, reaping the dividend and selling the shares, was to carry out a profit-making scheme. It did so, however, in the course of its business as a share dealer. I do not think that every business that involves the buying and selling of stock in trade is to be fragmented into a large number of separate transactions and the dealer taxed on the aggregate of the profits derived from each transaction considered separately. The taxable income of a business is to be ascertained by deducting allowable deductions from assesable income, and in the calculation of assessable income regard must be had to many considerations to be found specified in the Income Tax Assessment Act, such as all the appropriate items set out in s. 26; the requirement that trading stock on hand at the beginning of the year of income and at the end of the year of income must be brought into account; to the allowance of depreciation; to the deduction of bad debts; to past losses. It is the assessable income of the business as a whole to which regard must be had and from which deductions are to be made to arrive at taxable income. It is significant that s. 26(a) defines but one item to be included in assessable income, and, in my opinion, the whole of the carrying on of a business of buying and selling is not to be comprehended within s. 26(a), nor does that provision aptly apply to the particular dealings constituting, in total, the carrying on of a business. Section 26(a) deals with particular transactions which might otherwise escape from the tax net and it brings into assessable income profits, after outgoings attributable to the particular transaction have been taken into account. Outgoings made in earning a profit which is assessable income by virtue of s. 26(a) are not outgoings for the purposes of s. 51. There is no profit from a scheme to be included in assessable income until such outgoings have been taken into account. In most cases items of assessable income are gross receipts; a profit which is assessable income by virtue of s. 26(a) is a net receipt. In my opinion, therefore, the income derived from the transaction with which we are here concerned is not to be brought into account as a profit pursuant to s. 26(a). The transaction in question was part of the business of the taxpayer and it is the proceeds of that business that constitute the income of the taxpayer. I have re-read my observations about s. 26(a) in Australasian Catholic Assurance Co. Ltd. v. Federal Commissioner of Taxation (1959) 100 CLR 502, at p 509 , and further consideration of the problem has confirmed me in what I there said. (at p264)

8. There is, however, another reason for rejecting the learned Solicitor-General's second argument. That argument involves disregarding as assessable income the dividend which was declared and paid notwithstanding that it was received before there was any completed scheme that could yield a profit to be included as assessable income by virtue of s. 26(a). I consider that dividend was assessable income simply by virtue of the provisions of s. 44 of the Income Tax Assessment Act. Had this transaction been carried out by an individual, rather than by a company, there could, I think, have been no question but that the dividend which was received would be part of the individual's assessable income, although, of course, it would not be rebatable under s. 46. It makes no difference to the nature of the transaction that the taxpayer is a company. It is, of course, true that it is because company dividends are rebatable under s. 46 that dividend-stripping is so attractive, and, if it be thought that this is a practice which should be checked, it is to that section that Parliament may choose to direct some of its attention. It is not for the courts, however, to depart from Parliament's clear statement in s. 44 that assessable income of shareholders, including companies, shall include dividends, and to do so in order to bring the dividends into account as part of the profits of transactions of buying and selling outside the operation of s. 46 which makes certain dividends paid to companies rebateable. (at p265)

9. This alternative argument of the learned Solicitor-General is the argument which found favour with the learned trial judge. I regret that I cannot accept it. Subject to two matters which I shall have to mention, it seems to me that the taxpayer has done no more than taken advantage of the provisions of the Act to reduce its income in the year of the purchase of the shares by an outgoing of the purchase price paid for them; to increase its income in that year by the receipt of a rebatable dividend almost equal to the purchase price paid; and in the year of sale to have incurred a loss being the difference between the purchase price of the shares - which was also their value as stock in trade for taxation purposes - and their sale price. (at p265)

10. The first of the outstanding matters to which I want to refer is concerned with the application of s. 31 of the Income Tax Assessment Act. As I have already set out, the taxpayer, upon receipt of the dividend upon the Macgrenor shares, wrote down their value by approximately the amount of the dividend. The result of this was, in effect, that the shares were then in the taxpayer's accounts at or near market selling value, although they were eventually sold for less, no doubt to give the buyers some advantage. Thus, at the end of the year in which the shares were bought they were brought into account at 3,250 pounds, and in the course of that year they were sold for 21 pounds. However, in the taxpayer's income tax return they were, in effect, brought into account at 86,503 pounds 17 s. Od. by virtue of the adding back of what had been written off. There was no argument whether or not this sort of double-dealing - I use the word inoffensively - is permissible. Presumably it is, for when the Act provides a method for the ascertainment of the value of stock in trade for the purposes of determining assessable and taxable income (ss. 28 and 31) it does not go further and require that the taxpayer's profits should be determined in the same way for commercial purposes, or require the taxpayer's taxation return to accord with its commercial accounts. However, I do not pursue this matter further beyond noting that, had the taxpayer's return to the Commissioner been made up on the same basis as that upon which the taxpayer's books of account were kept, it would seem that the taxpayer would have made a substantial loss in the year ended 30th June 1964, for in that year it would have had the additional advantage of stock values at the end of the year reduced by the amount written off. In other words, the Macgrenor shares would, at 30th June 1964, have been valued at market selling value rather than at cost price. The course actually taken did give the taxpayer considerable taxation benefits in the year ended 30th June 1965 as well as in the year ended 30th June 1964. However, as no attention was devoted to what may be a problem that it is immaterial to solve, I refer to it simply to leave the matter open. (at p266)

11. The final problem relates to the proviso to s. 52. The loss said to have been incurred upon the sale of the shares is deductible by virtue of s. 51. What bearing then has s. 52 upon the matter? We were informed by counsel for the appellant that the case was conducted, at first instance, upon the footing that the Commissioner had been duly notified that the Macgrenor shares had been acquired by the taxpayer for the purpose of profit making by sale or for carrying on or carrying out of any profit-making undertaking or scheme. The notice was given, no doubt, to attract s. 52. There is, however, no such notice among the papers, nor was it possible to inform us of its terms. This might have been an insurmountable difficulty for the taxpayer if it had to rely upon s. 52 for the deduction which it claims. Consistently, however, with the view which I have expressed about s. 26(a) and its inapplicability to this transaction, I have come to the conclusion that s. 52 does not apply here. It is a companion section to s. 26(a) and it applies only when that provision would apply to a profit, which, if made, would have to have been included in assessable income. It seems to me the proper way to regard the loss here in question is simply that, in the course of its business as a dealer in shares, the Macgrenor shares were bought for 86,503 pounds 17s.Od., and, having been stripped of their dividend, were sold for 21 pounds. The difference was a loss incurred in carrying on the business of share-dealing. It is as if an aged stud cow in calf were to be bought by a breeder and dealer for $500 and after the birth of the calf the cow was sold to a butcher for $100. An outgoing of $500 and a receipt of $100 would, in that case, produce a loss of $400. The only difference in principle between such a transaction and that which is under consideration here is that, whereas a dividend is rebatable, the value of the calf would not be rebatable. (at p267)

12. Accordingly, I think this appeal should be allowed and the assessment reduced by allowing as a deduction from the assessable income of the taxpayer for the year ended 30th June 1965 the sum of 86,503 pounds 17s.0d., instead of the sum of 4,583 pounds which the Commissioner has allowed. (at p267)

WALSH J. In its income tax return for the year which ended on 30th June 1965 the appellant included a statement of profit which showed its net profit for the year as 55,021 pounds. It attached another statement, by which additions and deductions were made to and from that figure, in order to arrive at what the statement described as taxable income. One of the items of deduction was, "Loss on Sale of Macgrenor Shares 82,931 pounds". The facts relating to the acquisition and to the sale of those shares are stated in the judgment of Windeyer J. (1970) 120 CLR 177 from whose decision this appeal is brought. The above figure shown as the loss on the sale represents the difference between the cost price of the shares and the value which was placed upon the shares in the commercial accounts of the company as at 30th June 1964, following upon a writing down of their value for the purposes of those accounts after a large dividend had been received by the appellant from the Macgrenor company. The amount of 82,931 pounds had already appeared in the accounts submitted with the appellant's return for the year which ended 30th June 1964, as an amount written off on revaluation. In that return that amount was added back to the income for that year. (at p267)

2. In assessing tax for the year which ended 30th June 1965, the respondent did not proceed on the basis that any loss sustained upon the sale of the shares was a loss of capital or a loss of a capital nature which should be wholly disallowed. The loss was allowed but it was "adjusted" to 4,583 pounds. It is clear that in arriving at that sum the respondent ignored the actual amount (82,931 pounds), stated in the return as being the loss. The loss to be allowed was calculated by the respondent on the footing that in measuring it the amount of the dividend received had to be deducted from the figure obtained by subtracting from the purchase price of the shares the price at which the appellant resold them. It seems plain that the case was treated by the respondent as one to which s. 52 of the Income Tax Assessment Act 1936, as amended, (the Act) applied. (at p268)

3. In its notice of objection the appellant contended that the whole amount claimed by it was allowable as a deduction pursuant to s. 52. But it did not limit its grounds of objection to a reliance upon that section. It included a ground which is obviously based upon s. 51 and a ground which referred to "the accepted treatment of trading stock" and to the provisions of the Act which deal particularly with trading stock. (at p268)

4. The reasons for judgment of Windeyer J., who confirmed the respondent's assessment, do not refer specifically to the question whether the shares were "trading stock" of the appellant within the meaning of the Act. His Honour stated that the notice of objection put the appellant's claim on several grounds, that these were not all pressed by counsel for the taxpayer and that his main argument was upon s. 52. His Honour referred also to an alternative argument founded upon s. 51. It seems plain from the way in which his Honour dealt with that argument that he did not reject it upon the grounds which formed part of the argument put on behalf of the respondent to this Court, namely, that the purchase and the resale of the Macgrenor shares were transactions of a capital nature and that the shares were not trading stock within the meaning of the Act. His Honour said that he did not doubt that the amount which the appellant paid for the shares was an outgoing in the year in which it was paid incurred in gaining assessable income and was an allowable deduction under s. 51. It is plain from his Honour's reasons that in saying that he was not applying sub-s. (2) of that section, but was referring to the provisions of sub-s. (1) thereof. That means that he did not regard the outgoing as being an outgoing of a capital nature. Elsewhere in his reasons, Windeyer J. made findings that the appellant had dealt extensively in buying and selling shares with a view to profit and that its share dealings had been, throughout, a substantial part of its activities. He referred to the transaction under review as "an unusual transaction" but he said of it that it "is properly to be regarded as an incident in the business of the taxpayer". (at p268)

5. I have mentioned those features of the reasons for judgment because the acceptance or rejection of the contention of the learned Solicitor-General that this transaction was entirely of a capital nature must depend upon the view that is taken of the facts and it is, therefore, important to consider whether that argument gains support from the findings of fact made by his Honour. In my opinion, the view of his Honour as to the facts was not inconsistent with and, indeed, was the same as the conclusion to which my own examination of the evidence brings me, namely, that this transaction was a part of the appellant's business of dealing in shares and was a transaction of a trading character. Furthermore, I am of opinion that the shares formed part of the "trading stock" of the appellant. It is true that the appellant did not treat these shares as trading stock in its income tax returns for the years ending 30th June 1964 and 30th June 1965. No doubt that is a factor which may be taken into account in deciding whether they were part of its trading stock. But it has not been suggested and, in my opinion, it could not be maintained that it precludes the appellant from putting forward now, as one of the grounds upon which it disputes the assessment under review, the contention that the facts disclosed by the evidence are facts to which the provisions of the Act relating to trading stock are applicable. (at p269)

6. In the case of a company the business of which includes dealing in shares, it could scarcely be doubted that shares which it buys and which it intends to resell would generally be regarded as part of its trading stock according to the meaning in which, apart from any statutory definition, that expression would be understood. This was taken for granted in all the Courts, including the House of Lords, that considered the case of Craddock v. Zevo Finance Co. Ltd. (1946) 27 TC 267; 174 LT 385 . I cannot think that it ought to be denied that this is so in relation to particular shares, merely for the reason that the company expects or intends that the resale of those shares will be at a lower price than the cost price. In s. 6 of the Act it is provided that "trading stock" includes "anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange, and also includes live stock". I need not decide whether in this provision the word "includes" should be read as "means". If it should not, it seems clear to me that the Macgrenor shares were trading stock of the appellant. But if it should be so read, I do not think that a different conclusion should be reached. In Modern Permanent Building and Investment Society (in liquidation) v. Federal Commissioner of Taxation (1958) 98 CLR 187, at p 190 , Williams J. expressed the opinion that in ss. 28, 29 and 31 of the Act "trading stock" did not include choses in action. But, with respect, the reasons which his Honour went on to give for that opinion, although they may have been valid reasons for holding that the particular choses in action with which the case was concerned were not trading stock, did not warrant in my opinion the generalization which his Honour made. I find no difficulty in thinking of shares as being "on hand" at a specified time (s. 28) or in supposing that their value at a particular date may be ascertained for the purposes of ss. 29 and 31. In Australian Machinery and Investment Co. Ltd. v. Deputy Federal Commissioner of Taxation (1946) 8 ATD 81 , Rich J. made a declaration, at first instance, that certain shares and options held by the taxpayer company formed trading stock within the meaning of ss. 28 and 31. The case was a complicated one. There was an appeal and a cross-appeal and many questions were raised in them. According to Latham C.J. (1946) 8 ATD, at pp 91, 92 , the company did not appeal against that declaration and in the cross-appeal the ground that that declaration was in error was abandoned at the hearing. But Dixon J. (with whom McTiernan J. concurred) said (1946) 8 ATD, at p 107 that "as at present advised" he was not prepared to hold that the shares were trading stock within the meaning of ss. 28-31. Starke J. (1946) 8 ATD, at p 97 stated more positively the opinion that the shares and options did not form trading stock. Williams J. (1946) 8 ATD, at p 114 expressed the contrary opinion. There is nothing in that case, in my opinion, which is authority for the proposition that shares can never be trading stock within the meaning of the Act; and nothing in the reasoning in the judgments in the case requires the conclusion that in the present case the Macgrenor shares were not trading stock of the appellant. In my opinion, the evidence shows that they were purchased "for purposes of. . .sale", although it is clear that the appellant wanted also to get the benefit of the dividend and to get the advantage of selling the shares at a loss, to be offset against profits made on other dealings. I do not assert, of course, that shares are always trading stock in the hands of their owner; and even where the owner is a dealer in shares the circumstances may show that particular shares are not trading stock. But when shares are bought by a dealer in shares and it is intended that they are to be resold and that this will probably occur in the not distant future, I do not think they are to be denied the description of trading stock, either because the trader expects or intends that they will be sold at less than their cost price or because he seeks to obtain a commercial advantage from the transaction otherwise than from a profit on the resale, that is, an advantage from an expected dividend and from an expected taxation benefit. (at p271)

7. If the appellant had compiled its returns on the basis that the shares were trading stock, as in my opinion they were, it would have been entitled to take into account their value at 30th June 1964, either at their cost price or at their market selling value: see s. 31 (1). The appellant did not compile its returns in accordance with the provisions of ss. 28 and 31. But what it did was not for practical purposes productive in that year of a result more favourable to the appellant than the result which would have been obtained if those provisions had been then applied. For taxation purposes, in that year it did not treat itself as having suffered any loss by reason of the fall in the value of the shares which was the consequence of the payment of the dividend. It treated itself as still having shares worth the amount which it had paid for them. The dividend it received came into its income for that year. (at p271)

8. When the year which ended on 30th June 1965 is considered from the point of view of the application of ss. 28 and 31, that year could be regarded as having opened with trading stock in which were included the Macgrenor shares valued at cost. It could be regarded as having closed with trading stock which did not include those shares, which had been sold in that year. So far as that component in the trading stock was concerned, the result would be that the cost-price value of the shares would be deducted from the taxable income. The small sum received upon their resale would be of course an income item for that year. The result which I have stated would be in no way affected by the fact that a large dividend had been received in the previous tax year upon the Macgrenor shares. (at p271)

9. The foregoing conclusions appear to me to be justified by the evidence in the case and they have the result, in my opinion, that the appellant should succeed. I have already stated reasons for thinking that the course taken by the appellant in compiling its returns and in presenting its case at the hearing before Windeyer J. does not preclude it from seeking to challenge the assessment on that basis. I think that the same result could be reached, even if the provisions of the Act relating to trading stock did not apply, by reference to s. 51 of the Act. There are serious difficulties standing in the way of treating the amount which the appellant claims as a deduction as an "outgoing", within the meaning of that provision, incurred in the year which ended on 30th June 1965. But, in my opinion, despite arguments which have been advanced for the respondent as to the sense in which the word "losses" is used in s. 51, there was a loss which was in the circumstances allowable as a deduction under that section. The circumstances to which I refer are that for taxation purposes the diminution of the value of the shares was left out of account in the year which ended on 30th June 1964 and the appellant began the following tax year with shares which had cost it and which were to be taken (for relevant purposes) as being still worth over 80,000 pounds, but in that tax year it had sold them for only 21 pounds. Unless this were to be taken as a loss of capital (and I have already explained why I think it should not be so taken) I think it must be regarded as a loss incurred in carrying on the appellant's business, which was deductible under s. 51. But whether or not that opinion as to the operation in this case of s. 51 is correct, I am of opinion that in any event the appellant is entitled to succeed, because the case can be treated as one in which s. 28(3) operates upon the facts proved by the evidence to make allowable the deduction which the appellant claimed. (at p272)

10. The learned Solicitor-General has contended that if the transaction of the purchase and sale of the Macgrenor shares ought not to be held to be of a capital nature but should be regarded as bearing a trading aspect, then the appropriate way of dealing with it is to treat it as a profit-making undertaking or scheme, within the meaning of s. 26(a) and of s. 52 of the Act, and in working out the profit or the loss made or incurred, the dividend received on the shares must be taken into account. According to the argument, it would have been proper to treat the dividend as not being as such an item in the assessable income in the year in which it was received, but as being simply a factor in the calculation to be made for the purposes of s. 26(a) or of s. 52. That was not what the respondent did, but it was submitted that in the light of the facts disclosed by the evidence it may now be seen that that was the appropriate way of dealing with the transaction. Thus would be avoided the consequence, which would otherwise be involved in taking into account the dividend in the computation of a profit or loss for the purposes of s. 26(a) or of s. 52, that the amount of the dividend would be included twice (in this case once in each of two tax years) as an addition to the amount which but for the receipt of the dividend would have been the amount of the appellant's assessable income. But, in my opinion, this argument cannot be accepted. The amount of the dividend had to be included in the assessable income in the year in which it was paid, in accordance with s. 44. In my opinion the provisions of the Act do not permit the exclusion of the dividend from the assessable income of a taxpayer, who is assumed to be engaged in a profit-making undertaking or scheme, upon the ground that not until the undertaking or scheme has been brought to completion can the overall profit or loss be ascertained. Section 44 required that the dividend be included as such in the assessable income and this is equally so whether tax will be payable upon so much of the income as represents the dividend or the taxpayer will be entitled to a rebate in accordance with s. 46. (at p273)

11. The learned Solicitor-General submitted that even if the dividend ought not to have been excluded from the assessable income in the first of the two tax years covered by the transaction, it is nevertheless right to treat the transaction as one to which s. 26(a) or s. 52 applies and to bring into account at the appropriate time any ultimate overall profit or loss from the undertaking or scheme, taking the dividend into account in calculating the profit or loss. If that is what the Act provides, effect must of course be given to it. But the consequences of that construction of the relevant provisions of the Act are such as to cast doubt upon its correctness. I do not doubt that the appellant may properly be regarded as not having really suffered a loss of more than 80,000 pounds from the transaction concerning the Macgrenor shares. In calculating the commercial result achieved by the whole enterprise the dividend must be counted. But it is to be counted once only. The direct financial result of the whole transaction was, as the Commissioner concedes, a loss of some 4,000 pounds. But according to the argument now under consideration, the result for income tax purposes was an increase of over 81,000 pounds in the assessable income of the year ended 30th June 1964 and a decrease of about 4,000 pounds in the assessable income of the year which ended 30th June 1965. It should be added that it would not be consistent with this argument to say that the appellant could have claimed as a deductible outgoing in the former year the amount which it paid for the shares, because (except for the dividend which on this branch of the argument is treated as coming into income under s. 44) it is only upon the ultimate profit or loss of the whole undertaking or scheme that the provisions of the Act operate. In my opinion the arguments on behalf of the respondent as to the application of s. 52 and as to the manner in which for its purposes a loss should be computed ought not to be accepted in the circumstances of this case. In my opinion, the claim of the appellant to deduct a loss in the sale of the shares should not have been dealt with by applying s. 52 but should have been dealt with in the manner which I have stated earlier. (at p274)

12. In my opinion the appeal should be allowed. (at p274)

Orders

Appeal allowed with costs. Judgment of Windeyer J. set aside and in lieu thereof order that the appeal be allowed with costs and that the assessment be remitted to the Commissioner for re-assessment in conformity with the reasons for judgment.