Webb v Australian Deposit and Mortgage Bank, Limited - [1910] HCA 48

11 CLR 223

THOMAS PROUT WEBB (COMMISSIONER OF

TAXES FOR VICTORIA)

THE AUSTRALIAN DEPOSIT AND MORT-

RESPONDENTS.

GAGE BANK, LIMITED

ON APPEAL FROM THE SUPREME COURT OF Income Tax-Profits of company-Assets taken over for realization- Valuation of

assets-Decrease in value-Reduction of capital-Surpus above valuation on realization-Articles of association-Income - Tax Act 1903 (Vict.) (No. 1819), sec. 9-Companies Act 1896 (Vict.) (No. 1482), secs. 48, 88.

Sec. 9 of the Income Tax Act 1903 has not the effect of rendering taxable as income profits of a company which would not be income in the ordinary sense

The fact of the reduction of the capital of a company, pursuant to sec. 88 of the Companies Act 1896, is not by itself decisive of the question of what are the profits of the company for the purposes of the Income Tax Acts.

By Griffith C.J. and O'Connor and Higgins JJ.-The - articles of association of a company must be taken into consideration in ascertaining the profits of a company within the meaning of sec. 9 of the Income Tax Act 1903.

By Isaacs J. - -Internal regulations as to the disposal of income cannot be so taken into consideration.

The A. company was formed for the purpose of carrying on the business of banking and also to take over, for a certain price paid in cash, shares and deposit receipts, and realize the assets of another company consisting of debts owing to it and real estate held as security therefor. The amount of the price paid was the total amount of the debts so owing. The capital of the A. com- pany was in 1905 reduced pursuant to the Companies Act 1896 by a sum

11 CLR 224

representing the difference between the price paid for the assets and their estimated value in 1904. Subsequently to the reduction of the capital certain of the assets were realized, some of them for sums less than the values placed on them in 1904, others for greater sums, but all for sums less than the amounts of the debts for which they were securities, with the result that in each of the years 1905, 1906, and 1907 the total amount obtained by realiza. tion was greater than the total valuation in 1904 of the properties realized. By certain of the original articles of association provision was made for keep. ing an account of the realization of these assets, for charging against the sum realized the price paid for the assets, and for placing to the credit of the reserve fund any sum realized beyond that price. On the reduction of capital these articles were replaced by an article providing that all surpluses over the paid-up capital so reduced which might arise on realization should be carried to the credit of the reserve fund. Another of the original articles provided that the reserve fund might be encroached upon for the purpose of equalizing

Held, that such surpluses of realization in 1905, 1906, and 1907 were not "…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

Continue reading Webb v Australian Deposit and Mortgage Bank, Limited

Details

AGLC: Webb v Australian Deposit and Mortgage Bank, Limited [1910] HCA 48
Case: [1910] HCA 48
Decision Date: 16 September 1910

CaseChat Overview and Summary

The case of *Webb v. Australian Deposit and Mortgage Bank, Limited* involved an appeal to the High Court of Australia from the Supreme Court of Victoria concerning the taxability of certain sums received by the respondent company. The Commissioner of Taxes sought to levy income tax on amounts realised from the sale of assets, which the company argued were not "profits" in the sense contemplated by the *Income Tax Act 1903* (Vic.). The core of the dispute lay in how to characterise these realisation surpluses, particularly in light of a prior reduction of the company's capital.

The legal issues before the High Court were twofold: first, the interpretation of the term "profits" within section 9 of the *Income Tax Act 1903*, and second, whether the specific sums realised by the company in the years 1905, 1906, and 1907 constituted such taxable profits. The Commissioner contended that any increase in the surplus of assets over liabilities, or any enhancement of asset value distributable as dividends, should be considered profits, irrespective of internal company regulations. The company, conversely, argued that the nature of its business as an asset realisation company, coupled with its articles of association and the effect of its capital reduction, meant these surpluses were not profits in the ordinary sense and therefore not subject to income tax.

The High Court, in a majority decision, held that the surpluses realised from the sale of assets were not "profits" within the meaning of the *Income Tax Act 1903* and were not chargeable with income tax. The Court reasoned that the term "profits" in the Act should be understood in its ordinary colloquial sense, meaning income that would be recognised as such for an individual. While a reduction of capital under the *Companies Act 1896* (Vic.) might alter the basis for distributing profits, it did not, in itself, convert capital assets or their realisation into taxable income. The Court emphasised that the company was primarily an asset realisation entity, and the surpluses represented an unexpected recovery of capital assets, not income generated from its business operations. The articles of association, particularly those relating to the treatment of realisation surpluses and the reserve fund, were considered in determining the character of these amounts, with the majority finding they did not transform capital into distributable profits.

The appeal was dismissed, affirming the decision of the Supreme Court of Victoria. The High Court found that the sums in question retained their character as capital, rather than income, and were therefore not subject to income tax under the relevant legislation.

Orders