SUDGMENT No. 65/8. _ CATCHWORDS APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL - Income Taxation - goods which had previously been leased sold at a price greater than the cost price - whether ss.54-62 provide a code in relation to goods which may be depreciable - whether profit on sale was income or capital gain - whether goods must be acquired with intention of resale at a profit before profit can be income. Income Tax Assessment Act 1936 (Cth) ss.25(1), 28-36, 51, 54-62. MEMOREX PTY LTD v. THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA NSW G224 of 1987 Davies, Pincus and BFinfeld JJ. 2 December 1987 Sydney -2 DEC 1987 L GOURT OF FEDER USTRALIA PRINCIPAL REGISTRY wep eee mem og a IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. G224 of 1987 ee ew GENBRAL DIVISION On appeal from the Taxation Appeals Division of the Administrative Appeals Tribunal BETWEEN: MEMOREX PTY LTD Applicant AND: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Respondent CORAM: Davies, Pincus and Einfeld Ju. DATE: 2 December 1987 PLACE: Sydney REASONS FOR JUDGMENT Davies and Einfeld JJ.: This is an appeal from a decision of the Administrative Appeals Tribunal which affirmed a decision of the Commissioner of Taxation rejecting the objections to assessment lodged on behalf of the applicant, Memorex Pty Ltd. The years of income involved are the years of income ended 30 June 1977, 1978, 1979, and 1983 for which the a ee IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. G224 of 1987 i www ww GENERAL DIVISION On appeal from the Taxation Appeals Division of the Administrative Appeals }- Tribunal i a BETWEEN: MEMOREX PTY LTD . Applicant b ', AND: THE COMMISSIONER OF m TAXATION FOR THE a ' COMMONWEALTH OF AUSTRALIA Respondent CORAM: Davies, Pincus and Einfeld JJ. DATE: 2-December 1987 ba PLACE: Sydney i" MINUTES OF ORDER : THE COURT ORDERS THAT: . 1. The appeal be dismissed. by 2. The appellant pay the respondent's costs. , I t NOTE: Settlement and entry of orders is dealt with in i Order 36 Of the Federal Court Rules. applicant had substituted accounting periods, namely the calendar years 1976, 1977, 1978, and 1982. No objections were lodged with respect to the years of income ended 30 June 1980, 1981, and 1982 though the events of those years were similar to the events in the years with which we are concerned. The applicant is a distributor of computer equipment, both hardware and software, designed to be used in association with computer equipment manufactured and designed by others. Because of the rapidity of developments in the industry the average commercial life of the equipment is about five years. Most of the equipment distributed by the applicant was new equipment but some was used-equipment, for the applicant sometimes took a trade-in on new equipment or took back into its possession equipment that a customer had used. As a general rule, the applicant sold its equipment outright, either to its customer or to a financier who provided finance to the customer. However, for several years the applicant also leased equipment to its customers and from time to time, especially for some years from 1976, sought to promote this means of distribution. The leases were at first usually for two years but later for up to four years. On the expiration of a lease, the equipment would be re-leased to the customer, 1f required by the customer, or taken back by the applicant. From time to time, goods which were on lease were sold to the customer, such sales being promoted if funds were wey Sep te gee oe - 2 Ye i seen eee oe ee es w required. Goods which had come back to the applicant on the termination of a lease or as a trade-in might be leased or sold, or if not valuable in this country, scrapped or sent overseas to an associated company. In 1978, the applicant found it had the need for money and sold certain leased goods to a finance company. This was a confidential transaction between the applicant and its own financier. The lessees were not advised of the sale and the applicant continued to collect the payments of hire in its own name though it passed those payments on to the financier. The leasing of goods never formed the major part of the business of the applicant and the proceeds which the applicant received from the sale of goods which had previously been leased formed only a small part of the applicant's business. Nevertheless, the sales of goods which had been leased were certainly of sufficient magnitude and of sufficient regularity to be regarded as an ordinary part of the business of the applicant. Thus in the 1976 calendar year, the applicant had sales of $3,350,227.00, that item being undivided in the accounts but including in fact both the sale price of goods sold and the hire received for goods leased. The original cost of the goods on lease that year was $826,475.00. The gross receipts for equipment on lease, whi was disposed of, was $651,845.00. Of the previously leased goods disposed of, $325,710.00 worth of goods were sold at a profit over and above their original cost. That profit amounted to $145,723.00. This sum was claimed by the applicant as a capital profit. As in other years, the applicant gave details of this capital profit and the following is the schedule which the applicant submitted with its return of income for the year. "MEMOREX PTY. LIMITED YEAR ENDED 31St DECEMBER, 1976 DETAILS OF CAPITAL GAIN IN RESPECT OF EQUIPMENT ON LEASE ch Serial No. Month Cost Month Sold Proceeds Capital Gain Acquired in 1976 65984 Nov. 1973 2,840 Sept. 4,666 1,826 26767 Nov. 1973 2,899 Sept. 4,666 1,767 26615 Nov. 1973 2,488 Sept. 4,666 2,178 26493 Nov. 1973 2,899 Sept. 4,666 1,767 10133 Nov. 1973 4,033 July 4,600 567 20209 Jan. 1972 3,447 July 4,600 1,153 20839 July 1973 3,051 July 4,500 1,449 20988 Oct. 1973 2,595 July 3,000 405 20162 Oct. 1971 2,553 July 3,000 447 10309 May 1974 1,076 May 1,815 739 10523 May 1974 1,080 Sept. 1,200 120 103507~ May 1974 312 Sept. 536 224 50162 Aug. 1975 3,001 Sept. 4,259 1,258 50153 May 1974 1,127 Sept. 2,118 991 50165 May 1974 10,750 Sept. 25,628 14,878 20172 Dec. 1974 4,022 July 4,500 478 20683 Dec. 1974 4,598 May 4,600 2 Dec. 1974 4,567 May 5,822 1,255 50170 Nov. 1974 356 Nov. 424 68 50121 Nov. 1974 3,422 Nov. 3,678 256 50168 Nov. 1974 1,218 Nov. 2,103 885 10280 Nov. 1974 12,257 Nov. 30,765 18,508 Oct. 1975 27428 May 3,096 668 50174 Aug. 1975 2,900 May 4,315 1, yer x . + 5. 20195 Oct. 1975 2,370 July 3,055 685 51222 Dec. 1975 20,325 May 36,000 15,675 51220 Dec. 1975 20,325 May 36,000 15,675 50929 Mar. 1975 25,358 May 36,000 10,642 50101 Mar. 1975 8,710 May 9,500 790 11082 Apr. 1976 22,980 Sept. 71,932 48,952 $179,987 $325,710 $145,723 PUBLIC OFFICER" The above schedule dealt only with those goods previously leased that had been sold at a profit over and above their original cost. The goods previously leased but sold at a profit merely above depreciated value or at a loss were dealt with in the depreciation schedule submitted with the applicant's return of income. The issue in this case arises with respect to such of the equipment as had been leased and thereafter sold at a profit over and above its original cost to the applicant. The Commissioner took the view that each such profit was income while the applicant took the view that the profit was a capital gain. The applicant and the Commissioner were not in dispute that such of the computer equipment as was distributed by leasing should be dealt with, in the first instance, in accordance with the provisions as to depreciation which appear in ss. 54 to 62 of the Income Tax Assessment Act 1936 (Cth) ("the Act"). In brief, sub-s.54(1) provides for an allowance for depreciation on any eae ee ee Wrasse property being plant or articles owned by a taxpayer and used by him during the year for the purpose of producing assessable income shall be an allowable deduction. Sections 55 and 56 provide for the basis of depreciation and for its calculation. Section 59 provides that, on the sale of depreciated property, if the sale price is less than the depreciated value, the difference shall be an allowable deduction to the taxpayer and, 1f the price exceeds the depreciated value, the difference shall be brought to account as assessable income of the taxpayer, that is to say as a balancing charge. Section 59 reads, inter alia:- "(1) Where any property of a taxpayer, in respect of which depreciation has been allowed or is allowable under this or the previous Act, is disposed of, lost or destroyed at any time in the year of income, the depreciated value of the property at that time, less the amount of any consideration receivable in respect of the disposal, loss or destruction, shall be an allowable deduction. (2) I£ that consideration exceeds that depreciated value, the excess, to the extent of the sum of the amounts allowed and allowable in assessments for ancome tax under this Act and any previous law of the Commonwealth in respect of depreciation, shall, subject to the succeeding provisions of this section, be included in his assessable income of that year." We are not concerned in this appeal with the detailed operation of these provisions. The leased plant was depreciated by the applicant at rates acceptable to the Commissioner. If the leased plant was sold or disposed of at less than the depreciated value, the difference was claimed and allowed as a deduction from the applicant's assessable income. If the leased plant was sold or disposed of for a consideration greater than the depreciated value, the depreciation recouped was brought to account by the applicant as a balancing charge. We are concerned in this appeal solely with those goods which, having been leased, were at some later stage sold, either to the lessee or to another, at a price greater than the sum which those goods had cost the applicant on their acquisition. The profit arising from these sales, that 1s to say, the excess received over their cost, was considered by the Commissioner to be assessable income and by the applicant to be a non-assessable capital gain. The applicant put the view, in relation to goods which were depreciable, that ss.54 to 62 provided a code. The applicant said that, as sub-s.59(2) provided for the bringing to account as assessable income only so much of the consideration receivable on disposal as recovered depreciation previously allowed, it was not permissible to bring some other amount to account on a basis for which these sections did not provide. The code argument formed part of a number of submissions which were put to the Court, the general effect of which was that the Commissioner's assessment contravened both the basis upon which the Act proceeded and its specific provisions. It was submitted by Mr A.H. Slater, counsel for a proreaee the applicant, that the Commissioner had brought to account as assessable income net profit arising from the sale of goods in the course of the business of the applicant whereas the Act did not tax profit, as does the legislation in the United Kingdom, but taxable income being assessable income less allowable deductions. Mr Slater submitted that if the sales with which we are concerned were to be brought to account in a calculation of the applicant's taxable income, it could only be by treating the goods as trading stock, in respect of which sub-s.25(1),ss.28 to 36 and s.51 provided the code. Mr Slater submitted that, had the goods been trading stock, their original cost would have been deductible pursuant to sub-s.51(2), their sale price would have been assessable income pursuant to sub-s.25(1) and their value would have been reflected in the opening and closing stock values to be brought to account pursuant to s.28. Mr Slater submitted that those sections did not support the Commissioner's assessment, for the Commissioner brought to account not the sale price of the goods but net profit on sale. He submitted that the Commissioner accepted the goods to be plant or articles depreciable 1n accordance with the provisions of ss.54 to 62 yet his assessment did not accord with those sections, particularly s.59. The substance of this argument has, however, been rejected by the High Court of Australia in numerous cases. The banking and insurance cases, such as Colonial Mutual Life omoce- vee re race nt Assurance Society Ltd v. Federal Commissioner of Taxation (1946) 73 C.L.R. 604; Australasian Catholic Assurance Society Co Ltd v. Federal Commissioner of Taxation (1959) 100 C.L.R. 502; National Bank of Australasia Ltd v. Federal Commissioner of Taxation (1969) 118 C.L.R. 529 make it clear that profit on sale of investments may be brought to account as assessable income in appropriate cases notwithstanding that the investments have not been dealt with by the taxpayer or the Commissioner under the trading stock provisions of the Act. See also London Australia Investment Co Ltd v. Federal Commissioner of Taxation 77 A.T.C. 4398. In another field, that of the development of land, the High Court of Australia has likewise looked to general principles rather than to the specific provisions as to trading stock. In Federal Commissioner of Taxation v. Whitfords Beach pty Ltd 82 A.T.C. 4031, the High Court of Australia held that profits made on the sale of land which had been acquired originally by the taxpayer for a private purpose, but which had subsequently been committed to a business of development and sale, were taxable. The Court remitted to the Federal Court of Australia the question as to the date upon which the land became so committed and its value at that date. In Commercial and General Acceptance Limited v. Federal Commissioner of Taxation (1977) 137 C.L.R. 373 at pp. 381-383, Mason J. discussed the circumstances 1n which net profit could be brought to account as assessable income - 10. as pursuant to sub-s.25(1). His Honour said:- aoe epee Se "The judgment appealed from proceeds upon the footing that, notwithstanding the reference to 'gross income' { in s.25(1), the sub-section catches net profit in some circumstances at least. At first glance it might be thought that this view of s.25(1) fails to take account of the presence of s.51(1) which F provides for the deduction of outgoings from a taxpayer's assessable income. In the ordinary case +. in the process of arriving at the amount of net profit outgoings are deducted. To say that net 1 profit falls within gross income and is therefore . within assessable income seemingly 1s to say that : outgoings are deducted before arriving at the assessable income whereas s.5]1 requires that they be - deducted from that income. f To the extent to which there are cases in which the \ character of income may attach to a net profit which ' is derived from a gross receipt which lacks the i character of income, the inclusion of the net profit, ; 1£ otherwise authorized by the Act, can be reconciled | with s.51{1). The antecedent deduction of outgoings r from the gross amount received so as to ascertain the ' net profit figure would not involve the aplication of : s.5]1 because the gross amount received is ex hypothesi neither gross income nor assessable income. t And 1£ it is the net profit only which is taken into b assessable income there is no outgoing which has been r incurred in relation to that figure which can be \ deducted. 2 There is a problem in accommodating the language of s.25(1) to the notion that an amount of net profit forms part of gross income. Is the reference in the sub-section confined to the gross receipts only of the taxpayer which possess the character of income or i. does it also include a net amount having that . character, provided that the net amount is not itself an derived from gross income? The expression 'gross income' in relation to a taxpayer conveys the sense of entire income of a taxpayer. No doubt in the context of the Act that income is to be ascertained in the first instance by reference to the gross Lncome receipts of the taxpayer, but in my view it also includes a net amount which is income according to the ordinary concepts and usages of mankind, when the net amount alone has that character, not being derived from gross receipts that are revenue receipts." mayen yes ve ied ieee Metin a a ee To Pa ? a) ll. His Honour's remarks accord with the view subsequently expressed in Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd, cited above. At p.4039, Gibbs J. made it clear that, in his view, the profit made on the sale of the subject land constituted assessable income of the taxpayer. At p.4048, Mason J. said that the gross income was assessable under sub-s.25(1), but perhaps his Honour had had in mind what was said in Commercial and General Acceptance Ltd v. Federal Commissioner of Taxation, cited above. At pp.4057-8, Wilson J. accepted that the profits were assessable income. Accordingly, we proceed upon the footing that the subject profits were assessable income if properly regarded as income under general principles and that the assessment was not precluded by the fact that, in the circumstances of the case, it is difficult to fit the goods neatly and conclusively at all times into the category of trading stock or of depreciable plant or articles. In particular, in my opinion, ss.54 to 62 do not provide a complete code as to the taxation of goods which, at some time, may be depreciable. Those sections provide for allowable deductions in respect of goods or articles that fit the s.54 criteria and for a balancing charge un a case where depreciation has been allowed and the plant or articles have been disposed of for a consideration -f To cep res ae me es 44, ry v wf de nen Cee wi Sac ial ol a aL 12. , greater than the written down value. The ambit of these provisions 1s plain. They do not purport to nor intend to deal with the assessability of profits being the difference between the cost price of the goods and their sale price. They do not preclude that profit being brought to account pursuant to the provisions of sub-s.25(1) of the Act if it is otherwise proper to do so. We turn now to the general principles respecting the treatment as income of profits arising from the sale of goods. In London Australia Investment Co Ltd v. Federal Commissioner of Taxation, cited above, Gibbs J. at p.4403 said:- "When a taxpayer sells one of its investments, the question whether the profit on the sales should be treated as capital or income is to be answered by applying the tests stated in Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 T.C. 159, at pp.165-166, in a passage which has constantly been cited, or repeated, with approval: see, for example, C. of T. (Victoria) v. Melbourne Trust Ltd. (1914) 18 C.L.R. 413, at pp.420-421; Ruhamah Property Co. Ltd. v. F.C. of T. (1928) 41 C.L.R. 148, at pp.i52, 165; Australasian Catholic Assurance Co. Ltd. v. F.C. of T. (1959) 100 C.L.R. 502, at p.506 and White v. F.C. of T. (1968), 120 C.L.R. 191, at p.222. The principle was stated as follows in Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. (1946) 73 C.L.R. 604, at p.614: 'Prima facie the depreciation in or accretion to the capital value of a security between the date of purchase and that of realization is a loss of er accretion to capital and is therefore a capital loss or gain and does not form part of the assessable income ... But 1n the words of the Lord Justice Clerk in Californian Copper Syndicate v. Harris which have been so often quoted, "it 1s equally well established that enhanced values obtained from realization or conversion of securities may be so assessable, where what is done 1s not merely a realization or change of se et Tepe bree ee segs nt 13. investment, but an act done in what 1S truly the carrying on, or carrying out, of a husiness".' Their Honours went on to point out that not all of the proceeds of a business carried on by a taxpayer are income for the purposes of the Act; they will be so only if they are income 'in accordance with the ordinary usages and concepts of mankind, except in so far as the Act states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income' (see at p.615). However it is in my opinion established by this and the many other cases in which Californian Copper Syndicate v. Harris has been applied that 1f the sale in question 1S a business operation, carried out in the course of the business of profit-making, the profit arising on the sale will be of an income character. To apply this criterion it 1s necessary 'to make both a wide survey and an exact scrutiny of the taxpayer's activities': Western Gold Mines N.L. v. C. of T. (W.A.) (1938) 59 C.L.R. 729, at p.740. Different considerations may apply depending on whether the taxpayer is an individual or a company. In the latter case it is necessary to have regard to the nature of the company, the character of the assets realized, the nature of the business carried on by the company and the particular realization which produced the profit: Hobart Bridge Co. Ltd. v. F.C. of T. (1951) 82 C.L.R. 372 at p.383, citing Ruhamah Property Co. Ltd. v. F.C. of T., at p. 154." In Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd, cited above, Gibbs C.J. again examined the issue and reaffirmed the view above stated. At pp. 4037-8, his Honour said:- "The question whether the profits were income within ordinary concepts depends on the application of the tests laid down in Californian Copper Syndicate, v. Harris and in the cases that have followed that decision. Was what was done merely a realization of the taxpayer's asset, or was it something done in what was truly the carrying on or carrying out of a business? In other words the question is 'whether the facts reveal a mere realization of capital, albeit in an enterprising way, or whether they justify a finding that the [taxpayer] went beyond this and engaged in a [business of profit-making] in land albeit on one occasion only': see McClelland v. 14. F.C. of T. 70 ATC 4115 at p.4120; (1970) 120 C.L.R. 487 at p.496, where however the words used are 'a trade of dealing in land'; the words which I have ventured to substitute seem more consonant with the Australian authorities. The words 'merely' and 'mere' in these statements seem to me to be an important part of the definition of the line between profits that are taxable and those that are not. If the taxpayer does no more than realize an asset, the profits are not taxable. It does not matter that the taxpayer goes about the realization in an enterprising way, so to secure the best price. As I have said in F.C. of T. v. N.F. Williams, 72 ATC 4188 at p.4194; (1972) 127 C.L.R. 226 at p.249: 'The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of subdivision and sale or by the fact that he carries out work such as grading, levelling, road building and the provision of reticulation for water and power to enable the land to be sold to its best advantage.' Further the mere magnitude of the realization does not convert it into a business: Commr. of Taxes v. British Australian Wool Realization Association [1931] A.C. 224, at p.252. But if the taxpayer does engage in an operation of business, the proceeds are income and taxable." At p.4040, Mason J. likewise took as the correct principle that expressed by the Lord Justice Clerk in Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 T.C. 159 at pp.165-166. At p.4048, his Honour concluded:- "From what I have said 1t will be seen that it is my opinion that what the respondent did amounted to more than realization of an asset and constituted the carrying on of the business of land development. Accordingly, the gross income is assessable under sec.25(1). But for this conclusion I would have held that the activity of the respondent amounted to the carrying out of a profit-making undertaking or scheme which exhibited the characteristics of a business deal so that net profit of the respondent would have been assessable under the second limb of sec.26(a), 1f not 15. under sec.25(1). In the result I would allow the appeal." Murphy J. looked at the matter under para.26(a) of the Act with which we are not here concerned. At p.4054, Wilson J. referred to the statement of the Lord Justice Clerk in Californian Copper Syndicate v. Harris and at p.4057, after referring to remarks of Fisher J. in the Federal Court in Whitfords Beach Pty Ltd v. Federal Commissioner of Taxation, 79 A.T.C. 4648, his Honour said:- "... I agree with respect, with his statement that the true question is whether the taxpayer in proposing to maximise the amount of money which it received on sale of the land committed the land to a business venture or to a profit making undertaking or scheme or merely sold the land to the best advantage." The principles enunciated in Californian Copper Syndicate v. Harris, London Australia Investment Co. Ltd. v. Federal Commissioner of Taxation and Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd have more recently been affirmed and applied in Federal Commissioner of Taxation v. The Myer Emporium Ltd 87 A.T.C. 4363. See also Jennings Industries Ltd v. Federal Commissioner of Taxation (1984) 2 F.C.R. 273 and White v. Federal Commissioner of Taxation (1968) 120 C.L.R. 191. In the light of these authorities, it is helpful to turn to Gloucester Railway Carriage and Wagon Co., Limited v. Commissioners of Inland Revenue [1925] A.C. 469. In that er oe 16. case, a company manufactured railway wagons and dealt with them by selling them or letting them on hire. [In one year, the taxpayer decided to sell all the wagons used for letting on hire and did so at sums larger than the sums at which the wagons then stood in the taxpayer's books of account. The House of Lords upheld an assessment of the profit so obtained and held that 1t was not a capital accretion but was rightly included as a trade profit for the purposes of the corporation profits tax. At pp.474-5, Lord Dunedin, with whose reasons the other Members of the House agreed, said:- "The appellants argue that this is really a capital increment; and to say so they call these wagons plant of the hiring business. I am of opinion that in calling them plant.they really beg the whole question. The Commissioners have found - and I think it is the fact - that there was here one business. wagon is none the less sold as an incident of the business of buying and selling because in the meantime before sold it has been utilized by being hired out. There is no similarity whatever between these wagons and plant in the proper sense, e.g., machinery, or between them and investments the sale of which plant or investments at a price greater than that at which they had been acquired would be a capital increment and not an item of income. I think that the appeal fails." A like decision was Minister of National Revenue v. British and American Motors Toronto Ltd [1953] C.T.C. 177 which concerned a car dealer who sold new and used cars and trucks. Jt was held that a profit made on the sale of one vehicle which had been acquired in 1944 and used by an employee until sold in 1949 was a capital profit but that the profits derived in 1949 on the sale of nine cars which had cee see see eg pe soe 1 ee i erent ee 17. been acquired in 1948 and used by employees for a short time only was part of the dealer's taxable profit. Cameron J. held that the one vehicle had been bought for use as and had been used as a capital asset and that the profit on its sale was a capital profit but that the profits on sale of the other vehicles were profits on the sale of inventory. That decision was followed in Minister of National Revenue v. J.T. Labadie Ltd [1954] C.T.C. 90 and Canadian Kodak Sales Ltd v. Minister for National Revenue [1954] C.T.C. 375. The last mentioned case is of particular interest for in that case the taxpayer had, until 1951, leased out its goods, photographic equipment, and had subsequently changed its business policy and thereafter sold some and leased some. Thorson P. held that the profits on all sales, including on the sale of goods that before 1951 were leased only, were taxable income. A like decision in New Zealand was Funfair Enterprises Limited v. Inland Revenue Commissioner (NZ) 9 A.I.T.R. 62. In argument Mr Slater submitted that the correct principle was to be found in remarks of Jacobs J. in London Australia Investment Co Ltd v. Federal Commissioner of Taxation, cited above. At p.4410 his Honour said:- "Therefore, once profits on sale are found not to fall within the first limb of sec.26(a), the determinant 1s the carrying on of a business, not any associated business in a general sense, but the specific business of acquisition with a purpose or intention or expectation of resale and subsequent resale with consequent profit. Though frequent activity of acquisition and resale does not necessarily signify a business, it is evidence from which it may be Sore ot nr gee [a » " 18. inferred that there 1s a business. First, the frequency of the activity may itself tend to show that 1t is not of a private or of a casual nature, but that rather the person is carrying on the activity as a business operation. Secondly, the frequency of the activity may enable the inference to be drawn, 1f£ the fact be in dispute, that there was a purpose or intention or expectation, at the time of acquisition, of dealing at a profit if and when a Suitable occasion should arise. Nevertheless, it must be made guite clear that frequency of an activity is not synonymous with business. There may be no business despite frequency and on the other hand there may be a business where the activity is an 1solated one. Every business must begin with an initial transaction." It was submitted that, in his Honour's view, profits were not assessable unless it was shown that the relevant goods had been acquired for the purpose or intention or expectation of resale with consequent profit. It was submitted that, in the present case, it could not be shown that it was intended at the time of the acquisition of the subject goods that they would in fact be sold at a profit as distinct from the best price that could be obtained for them when the time came for their disposal. We do not take the remarks of Jacobs J. to have the consequence that Mr Slater attributed to them. His Honour later said:- "A circumstance which appears to me to be of substantial significance is that referred to by Kitto J. in National Bank of Australasia Ltd. v. F.C. of T. 69 A.T.C. 4042 at p.4047; (1969) 118 C.L.R. 529 at p.537: ',.. what was recovered through the sale of the shares was circulating capital, and what ultimately was not recovered was a loss on revenue 19. account just as any excess would have been an income profit: cf. Punjab Co-operative Bank Ltd., Amritsar v. Income Tax Commissioner, Lahore, [1940] A.C. 1055 at p.1072; Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. (1946) 73 C.L.R. 604 at pp.608, 614; Australasian Catholic Assurance Co. Ltd. v. F.C. of T. (1959) 100 C.L.R. 502; C. of T. v. Commercial Banking Co. of Sydney (1927) 27 S.R. (N.S.W.) 231." His Honour laid emphasis upon the nature of the business activity. In any event, it is well settled that, if goods are traded in the course of a business of trading in such goods, the trade in particular goods may be on revenue account whether or not the goods were or were not traded in with an expectation of profit. See Investment and Merchant Finance Corporation Ltd v. Federal Commissioner of Taxation (1971) 125 C.L.R. 249 at 255, 262 and 269; Patcorp Investments Limited and Others v. Federal Commissioner of Taxation 76 A.T.C. 422 and Curran v. Federal Commissioner of Taxation (1974) 131 C.L.R. 409. The principles we have enunciated above are in substance those which were applied by the Administrative Appeals Tribunal. The Tribunal concluded that the profit derived on the sale of the computer equipment was derived in the ordinary course of its business activity. The Tribunal held that the profit was not a profit arising on the mere realisation of capital but arose from dealing in the computer equipment to the best advantage of the applicant's business. The Tribunal found, inter alia:- a8 were ase per ee eo . opr rr 20. "2, The taypayer company was involved in acquiring by purchase from 1ts holding company in the united States, computer machines, the same to be then sold in Australia and/or leased to customers at and in accord with, the most favourable terms it could obtain. 5. Even where there had been a lease to a customer the equipment might be, and in some cases was, sold to the lessee customer or to a third party on the lease being terminated. A sale of a piece of equipment was always in contemplation by the taxpayer, at least as a possible method of realisation of its interest in the computer equipment. The taxpayer always expected and intended to profit by the realisation by lease or sale of its interest in the computer machine, be it, that of owner simplicita, or owner/lessor. The sale of the leased equipment was not a mere realisation of an investment and/or fixed asset at a profit but a step taken, be it the first step, to give effect to a policy stratagem in 'the course of a new part of the taxpayer's ordinary business'. (Jennings Industries Limited v. F.C. of T. 84 ATC 4288, 4294). 6. The advantage to the taxpayer of the one course of dealing or the other might and did change. The proportion of sales of purchased equipment to equipment on lease, has already been illustrated. The emphasis as one might expect, in a commercial enterprise seeking to make profits, changed dependent upon an assessment being then made by the executives of the taxpayer and its parent company as to the form of commercial transaction which would result in the most promising profit position for a particular period. Thus, the emphasis changed from sales to leasing, from leasing to sales to lessees, and from leasing back again to sales. 7. I see no reason, on the evidence, to regard the sales the subject of this review as different in any relevant sense from the other sales of the taxpayer. I consider that they were all directly relevant to the profit making activities of the taxpayer, all designed to turn to account and profit the equipment acquired by it from its holding company, all an integral part of the taxpayer's business to deal in computer equipment. What was done was not merely a realisation of leased equipment but an act truly done in the carrying on of its business." ee eee cn ce ween wo a 21. The Tribunal concluded that the special sale to the financier in 1978 had like features. In our opinion, no ground has been shown for disturbing the Tribunal's findings on these matters or the conclusion that the subject profits were assessable income of the applicant. It was submitted by Mr Slater that the applicant's business of leasing computer equipment was a business separate from its business of distributing computer equipment by sale. The outline of counsel's argument contains the following paragraph:- "Commencing in 1976 (35.9) and continuing until at least 1982 (49.2) the Appellant diversified its business activities into a new area, distinct from its previously subsisting activity of selling computer supplies and peripherals. The new area of business was that of owning and hiring out for reward computer peripheral equipment. The object of establishing and operating this business was that of producing a steady income stream which would cover fixed monthly expenses (35.9-36.4)." The evidence does not support this submission. It is clear from the schedule we have already set out that goods were leased as far back as 1971 and many of the goods sold in 1976 were first acquired in 1973 or 1974. And Mr Chesters, the only witness for the applicant, gave evidence that when he joined the company in 1976 one of the initial tasks was to establish records of all the equipment then on lease. The To wee croepe mest ore war ony rete ps rere aes ee 22. evidence shows that the usual method of distribution undertaken by the applicant was distribution by sale but that during the years in question, sometimes with more enthusiasm than at others, the applicant offered to its customers the option of purchase or lease of the computer equipment. It was the customer who decided the form that the transaction would take. The evidence shows that the applicant had only one business, that of distributing computer equipment, the distribution involving not only the supply of equipment but also advice as to the nature of the equipment required, the design of equipment packages and the service of the equipment when supplied. The equipment that was supplied was ordinarily equipment which was designed and structured for the needs of the particular customer. The applicant did not have a business in which it held standard pieces of equipment in stock and hired that equipment out to one customer after another. It normally supplied equipment for a particular requirement and supplied that equipment, at the customer's option, either by outright sale or by lease. Moreover the applicant's preference to lease or sell was very much affected by the need of its business. Thus, in June 1978 the applicant sold to its financier, in the special transaction I have mentioned above, 19 pieces of equipment which it had leased out in February and April 1978. In the same month it sold to a financier for a customer 4 pieces of equipment it had leased to the customer in April 1978. In ome may ena Ee ee 82 OTN eee aos, 23. some years, the sales tended to be bunched rather than spread randomly throughout the year, an indication that the goods were sold when it was convenient for the applicant to achieve sales. In the 1980 year, most of the sales took place in September and 1n December. The goods were leased or sold as the exigencies of the business, including its need for cash, demanded. There is no analogy between this case and the case of plant or equipment that a taxpayer may have and may use as part of the structure of an enterprise. The subject goods were part of the goods in which the applicant was dealing. When it was profitable or financially convenient to do so and the customer agreed, the goods were leased, rather than sold outright. But they were destined for sale or other disposal by the taxpayer sooner or later, either to the customer, another customer, an overseas affiliate or perhaps if they had no value at all, by scrapping. The term of a lease was not usually for the whole of the effective commercial life of the goods. If the goods were returned by the customer at the end of a lease and they then had value, they would be dealt with again as part of the goods which it was the business of the applicant to supply. In our Opinion, the decision under appeal was correct. It is, therefore, unnecessary to consider whether ' wer soe wy WTR wert ty r "te rf ' 24. the Tribunal's finding that the applicant carried on only one business involving both the sale of equipment and the leasing of equipment according to circumstances was a finding which involved a point of law and which thus may be reviewed in an appeal which is limited to points of law only. It 1s interesting to note that in the Gloucester Railway Carriage and Wagon Co., Ltd. v. Commissioners of Inland Revenue, cited above, Rowlatt J. at first instance, Warrington L.J. and Eve J. in the Court of Appeal and all members of the House appeared to regard the crucial finding of the Special Commissioners as a finding of fact, although Pollock M.R., in the Court of Appeal, thought otherwise. It is not necessary to consider the issues arising under paragraphs 26(a) and 26AA(A) of the Act which were touched upon by the Tribunal. We would dismiss the appeal with costs. I certify that this and the 23 preceding pages are a true copy of the Reasons for Judgment herein of the Honourable Mr Justice Davies and the Honourable Mr Justice Einfeld. Associate: — Geciheo Date: A 'aA-97 Jot rete roe ree man Se re mee meee Se te tt type cle ee ant " Counsel for the applicant: Solicitors for the applicant: Counsel for the respondent: Solicitors for the respondent: Dates of hearing: 25. Mr A.H. Slater Baker & McKenzie Mr G.K. Downes, Q.C. with Mr C.L. Lonergan Australian Government Solicitor 14-15 October 1987 see oars * IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) NSW G224 of 1987 GENERAL DIVISION ) ON APPEAL FROM THE TAXATION APPEALS DIVISTON OF THR ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: MEMOREX PTY. LTD. Applicant AND: COMMISSTONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Respondent CORAM: DAVIES, PINCUS & EINFELD J. DATE: 2 pecember 1987 REASONS FOR JUDGMENT PINCUS J.: This is an appeal from the Administrative Appeals Tribunal constituted by a presidential member, relating to assessments of income tax. The appellant carried on business during the relevant years as a supplier of computer equipment such as disc drives, tape drives, printers, visual display units and the like. Tt bought the goods from its American parent company and initially either sold or leased them to customers. The dispute relates to Lowe one, So oer emp 5 the sale of leased items, many of which were sold either during the currency of a lease, at its termination or during a holding-over period. The appellant's principal contentions are that the leasing of computer equipment should have been regarded as a separate business or a separate part of its business, that the leased equipment constituted part of the capital structure of that business, and that profitable sales of such equipment gave rise to capital gains. It was also contended, in effect, that the circumstance that the leased goods were depreciable under the Act protected the profits on their sale from taxation, Since the only appeal available is one on a "question of law", under s.44(1) of the Administrative Appeals Tribunal Act 1975, the proceedings are inherently narrower in scope than the former appeal under s.196 of the Income Tax Assessment Act 1936, from a decision "involving a question of law". Under that provision, the appellant could canvass the whole case once it was demonstrated that a question of law was involved. Here there is certainly at least one question of law in the case, namely whether s.59(2) of the Income Tax Assessment Act exhaustively prescribes the extent to which profit on the sale of depreciable goods is included in assessable income - a matter dealt with below - but any other question sought to be raised on the appeal is beyond the jurisdiction of this Court unless 1t be one of law. That appears to me to create some difficulty with respect to the question whether the receipts in issue, from sales rs, i foal Sheetal Deel tatatal = i of leased equipment, constitute income in accordance with ordinary usages and concepts. There is authority that, at least when all the material facts are found, that is a legal point: Hayes v. Federal Commissioner of Taxation (1956) 96 C.L.R. 47 at p.51 per Fullagar J., XCO Pty. Ltd v. Federal Commissioner of Taxation (1971) 124 C.L.R. 343 at p.348 per Gibbs J. On the other hand, Mason J. (as his Honour then was) in Hope v. The Council of the City of Bathurst (1980) 144 C.L.R. 1 at p.7 pointed out, after quoting from Hayes' Case, that: ",.. special considerations apply when we are confronted with a statute which on examination is found to use words according to their common understanding and the question is whether the facts as found fall within these words." His Honour went on to refer to authority for the view that if the material before the Court "reasonably admits of different conclusions as to whether the appellant's operations fall within the ordinary meaning of the words", then the conclusion to be drawn is a question of fact. That view has been applied in, for example, The Jedko Game Company Pty. Limited v. -Collector of Customs New South Wales (10 March 1987, unreported) in this Court. That case was an appeal in a similar class - i.e. a revenue appeal from the Administrative Appeals Tribunal to this Court - and the appeal failed on the ground that has just been mentioned. The Court held that the material before the Tribunal reasonably admitted of differing conclusions as to whether the goods there in question fell within the ordinary meaning of the relevant words; no question of law arose. A similar problem was dealt with in this Court in Times Consultants Pty. Limited v. Collector of Ww TE. ree oS were *" Customs (Queensland) (11 September 1987, unreported), but the Court was divided as to whether there was a question of law involved. No objection in point of jurisdiction was taken on behalf of the respondent, but that cannot overcome the difficulty. To come to the central point of the appeal, it could hardly be said that only one conclusion is reasonably possible as to whether in the particular circumstances of the case the receipts from the sales of leased goods constituted income in accordance with ordinary usages and concepts. I do not find it easy to see how, if the view acted on in the Jedko Case (above) were applied, the conclusion the Tribunal reached on that point could be reversed here. It may be that because of the specific decisions of single judges of the High Court referred to above - i.e. in the XCO and Hayes Cases - the proper course is to treat it as settled that the question whether, on precisely defined facts, a receipt constitutes income in the ordinary sense is one of law. One should perhaps be encouraged to adopt that view by the consideration that otherwise Tribunal decisions on such matters which are not rationally able to be reconciled must be left undisturbed, as not containing any legal error. I have come, in the end, to the conclusion that for reasons of substance the appeal must fail and that it 1s right to express my views on it without coming to a conclusion on the jurisdictional point. It has to be kept firmly in mind, however, that no merely factual point is open on such an appeal as this. The case concerns profits on sales in four financial years, and with one exception which will be mentioned, the circumstances relating to the sales appear to have been much the same in each year, If the equipment purchased from the parent company was disposed of, that occurred, according to the evidence, in one of the following ways: 1. Outright sale - the principal method of disposition. 2. Lease to a customer for a period and then sale to that customer either during, or at the expiration, of the lease. 3. Scrapping of equipment. According to the findings of the Tribunal, the "average term" (by which, presumably, is meant the usual term) of leases, was two years, but some were for four years. The useful life of the equipment was about 5 years. In three of the years in question, namely those ending 31 December 1976, 31 December 1977 and 31 December 1978, the sum of $194,372, in total, of the profits in question was derived from sales made during the first 12 months of leases and the sum of $138,588 was derived from sales made during the second 12 months of leases. The total amount of profit derived from ail sales of previously leased equipment in those years was $395,028. It appears, then, that about 84% of the carr raetees ee Myon a, wt te , ape ene ee "Ao profits in question in those years came from sales made within the first two years of leasing. It seems evident that sales of leased equipment well before the equipment had reached the end of its useful life were fairly commonly made and give rise to the bulk of the profits the source of the present dispute. It is true that receipts from sale of leased equipment were considerably less in total, during the four relevant years, than the gross income of the appellant's business; but such receipts were nevertheless substantial, and according to the findings totalled some $1.3 million. During the seven years from 1976 to 1982 inclusive, some 190 disposals of leased equipment, producing profits, took place. In the light of these figures, it could not have been (and indeed was not) argued that the relevant sales were insufficient in number or amount to constitute or be part of a business of trading in the equipment in question. The main contention which was made was that the leased equipment should be regarded as being in a quite distinct category and that equipment falling into that category was not bought for trading, but for leasing, and was therefore capital equipment. Reliance was placed upon remarks made by the High Court in Commissioner of Taxation v. Myer Emporium Ltd. (1987) 61 A.L.J.R. 270, quoted below. That case concerned the question whether a lump sum received by a company in consideration of an assignment of its right to receive interest on a loan it had made oy rte cre cote ee ne tekan eter see? sep eee e* was income or capital. In discussing the "proposition that a mere realisation or change of investment is not income", the High Court said that such profits (at p.274): ",.. may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realised subsequently in order to capture the profit arising from their expected increase in value ..." The Court went on to say: "Tt is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset ,be not a revenue asset on other grounds, the profit made is capital because it proceeds from the mere realisation." Counsel for the appellant relied upon these remarks in support of the view that, there being no intention to sell at a profit at the time of acquisition, and no other reason to treat the assets as revenue assets, the profits were capital. He relied also upon remarks made by Jacobs J. in London Australia Investment Co. Ltd. v. Federal Commissioner of Taxation (1977-78) 138 C.L.R. 106 at p.128. The critical part of the discussion in the Myer Emporium Case, for present purposes, is the qualification "if the asset he not a revenue asset on other grounds". The High Court has more than once had occasion to deal with the contention that a dealer in certain property should not be treated as a dealer in relation to sales not falling into the ordinary pattern of its trading business. In Investment and Merchant Finance Corporation Limited v. The Commissioner of Taxation of the Commonwealth of Australia (1971) 125 C.L.R. 249, a dealer in shares sold some of them for 0.02% of their purchase price. The transaction was, of course, one of dividend-stripping and it was argued that the shares in question did not form part of the ordinary share trading business (p.257); McTiernan J. so held (p.258). However, the majority were of a contrary opinion, Barwick C.J. holding that "... 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" (p.255). Walsh J. said (p.269): "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 ... 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." His Honour went on to hold that even if the shares were not trading stock, a deduction should be allowed under s.51 of the Act as the loss was one "incurred in carrying on the appellant's business" (p.272). In The Commissioner of Taxation of the Commonwealth of Australia v. Patcorp Investments Limited (1976) 140 C.L.R. 247, the Court was urged to depart from the view it had adopted in the case just mentioned. Gibbs J., with whom Stephen J. agreed, or re A Hi ep Le i eee eee oe > rejected a contention that: ",.. the transactions presented such extraordinary features that they should properly be regarded as isolated dealings, not forming part of the ordinary ebb and flow of the business of share trading ..."" His Honour went on to hold that the circumstance that the transactions were not intended to produce a commercial gain, but were carried out to obtain a taxation advantage and not to make a profit, did not take them outside the scope of the share-trading business. Although the point was not discussed by the Court in Curran v. The Commissioner 'of Taxation of the Commonwealth of Australia (1974) 131 C.L.R. 409 because it was there common ground (see per Gibbs J. at p.417) that the shares were trading stock and should be treated as such, the result of that case was consistent with the Investment and Merchant Finance Case and the Patcorp Case. It was suggested by counsel for the appellant, during the course of argument, that the recent decision of this Court in Federal Commissioner of Taxation v. John (1987) A.T.C. 4,713 provided a basis for distinguishing the line of High Court authority to which I have referred. I do not so read the case. Bowen C.J. pointed out at p.4,718 that there was no established business of trading in shares, and Beaumont J. (pp.4,735, 4,736) decided the matter on the basis that at the outset the taxpayer was not engaged in any business and her partners in the transaction in question were not persons who had otherwise engaged in the business of trading in shares. yore .w we 2? my 10. In my view the Patcorp Case and its like show the difficulty of abstracting, when dealing with an established trader in a particular kind of property (such as the appellant), certain sales of that sort of property from the rest of the sales. Patcorp demonstrates that it is not necessarily enough, in order to justify that course, to show that the sales sought to he separated out were not of property bought for resale at a commercial profit; I do not see why the circumstance that the sales in issue here were of equipment originally leased should be thought to require that such sales be treated as taking place ina distinct business. In my view, the argument advanced on behalf of the appellant is somewhat similar to that rejected by this Court in Federal Commissioner of Taxation v. Marshall and Brougham Pty. Ltd. (1987) 73 A.L.R. 261. The taxpayer there managed a group of building companies and invested the group's cash in short-term loans, one of which proved to be irrecoverable. The loss was held to be on revenue account, although the majority thought the taxpayer was not in the money-lending business. Bowen C.J. said at p.268: "From some aspects the business engaged in by the taxpayer might be regarded as a separate enterprise or a diversion from its ordinary business ... It is necessary to place an interpretation upon what was done concerning this investment of multiple amounts from time to time in the short term money market with two financial institutions. It appears to my mind to be more an integral part of the whole business carried on by the taxpayer in its management of the affairs of the group, rather than a separate enterprise or a separate use of capital assets of its own ..." RN Sr eee ene er seep me ee, "a oer ar seeps il. So here; no doubt a possible view of the matter is to treat the leasing activities as a distinct enterprise, but the more reasonable view of the matter, being that accepted below, is that sales of leased equipment were during the years in question an integral part of the appellant's business as a supplier of computer equipment. The leasing part of the business was not separate in a physical or accounting sense from the rest of the appellant''s business. Counsel for the appellant contended that there was one important matter distinguishing the assets leased from those initially acquired for sale, namely that each and every item was, at the time of purchase from the parent, earmarked as one intended for leasing or for sale. There was, however, no specific finding in favour of the appellant on that point, and an examination of the evidence relating to it makes one doubt that any such finding would have been open. That was so because it was not shown that none of the items leased to customers was taken from stock, rather than being specifically imported against an order. At all material times, equipment of substantial value was held in stock. I said above that there was an exception to the proposition that the circumstances relating to the sales in question appear to have been much the same in each year. That exception is that in mid-1978 the appellant received instructions from its parent, Which was short of cash, to "generate cash whatever way we could". The appellant responded to that by selling a considerable quantity of leased equipment to a company called Hunter Street Finance Ltd. The evidence was that the sale prices were calculated on the basis of the value of the unpaid aoe cor: 12. rental. The assignee arranged that the appellant would continue to collect the rental from the customer and pass it on. According to evidence presented on behalf of the appellant, the title in the equipment passed to the assignee finance company; the sales were apparently not by way of security only. Counsel for the appellant argued that, whatever might be said about other sales of leased equipment, the 1978 sales in question were "by any standard extraordinary" and were not steps taken in the course of the appellant's business. It seems to me clear, however, that the circumstance that the sales were made in.response to an urgent need for cash does not require that they be treated differently for tax purposes, During the relevant years, the appellant's business was directed toward deriving profit from the distribution of computer equipment, principally by sale, but also through leasing. That some of the sales were of leased equipment does not, in accordance with the views expressed above, put the profits derived from them in a special category, mor inmy opinion does the additional circumstance that the leased equipment sold to Hunter Street Finance Ltd. was sold in response to a liquidity crisis. It often happens in business that a trader sells goods in such a situation more quickly and cheaply than he would otherwise have done, but that cannot change the character of the sales and make them capital transactions. Subject to two remaining matters, then, the conclusion arrived at is that the Tribunal was correct in its conclusion that py weme 8 ore ne 13. the profits were properly taxable as income under s.25(1) of the Act. The two points not so far' dealt with are, firstly, a contention that the profit was wrongly calculated and, secondly, the argument based on s.59(2) of the Act referred to above. Calculation of Amount of Profit Counsel for the appellant argued that the goods which were first leased out and later sold were not, at the time of first acquisition, trading stock. He said the proper method of Calculating the profit was to treat them as having been taken into stock immediately before sale and at their then value. This point is not taken, or even hinted at, in any of the notices of objection, but assuming it to be available to the appellant, the argument should, in my opinion, be rejected. It was based upon authorities of which the most recent is The Commissioner of Taxation of the Commonwealth of Australia v. Whitfords Beach Pty. Ltd. (1982) 150 C.L.R. 355. There, land was initially bought by the respondent company with no profit-making purpose, but after many years the shares in the company were acquired by shareholders who intended to, and did, subdivide the land and sell it. The majority of the Court said that the proceeds of sale were assessable under s.25(1}, but did not have to deal with the question of quantum. However, the case at least implicitly approves the basic method of determination of profit which the Commissioner had used, namely that the land should be brought in at its value when committed to the LAs Ne . _y rere ros 14. profit-making undertaking or scheme in question, although there was some doubt as to the precise details of that process: see per Gibbs C.J. at p.360. Logically, it has to be admitted that there is something to be said for the view that a similar method of calculation should be adopted here. Instead, the respondent has simply assessed on the basis that the difference between purchase price and sale is assessable income. That course has the support of the actual result of a number of cases in the High Court in which a similar situation was dealt with. In Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation 73 C.L.R. 604, a life insurance company was taxed on the profits derived from shares and debentures, the amount in question being the difference between cost and sale price. No point was taken as to whether the entire sale price, or merely the profit, came in under s.25(1), but the Court distinctly held that the profit was "income according to ordinary usages and concepts": pp.615, 621. In Australasian Catholic Assurance Company Limited v. Federal Commissioner of Taxation (1959) 100 C.L.R. 502, a similar result ensued. There, the facts were rather close to the present since the property in question had for some time been leased. Menzies d. held that what an insurance company makes or loses in changing its investments - "..,. is, JI think, properly to be regarded as something to be taken into account, together with intermediate income, in deciding whether, overall, the investment produced a profit or a loss. Any profit realised on sale is of the same character as the annual income, and both go to make up the return." Again, in London Australia Investment Company Ltd. v. Federal Commissioner of Taxation (1977) 138 C.L.R. 106, a case concerning share sales made by an investment company, a similar result ensued. In none of these cases was any attempt made to defend as a matter of principle the notion that profit, rather than gross income, came in. However, the point was briefly alluded to by Mason J. (as his Honour then was) in Commercial and General Acceptance Ltd. v. The Commissioner of Taxation of the Commonwealth of Australia (1977) 137 C.L.R. 373 at pp.382, 383. His Honour referred to the use of the expression "gross income" in s.25(1) and said: "No doubt in the context of the Act that income is to be ascertained in the first instance by reference to the gross income receipts of the taxpayer, but in my view it also includes a net amount which is income according to the ordinary concepts and usages of mankind, when the net amount alone has that character, not being derived from gross receipts that are revenue receipts." It appears to follow from these cases that it may be correct to treat a profit as "gross income" under s.25(1) in certain circumstances, and that it is right to do so in circumstances such as those here in issue. It should be added that if the contention made on behalf of the appellant were accepted, it would seem right to bring into the accounts not the retail but the wholesale value of the items sold. were pe ee ee, Solis Met ated sat Overlapping with Depreciation Provisions The second point which needs to be dealt with is the submission that s.59(2) of the Act exhaustively sets out the extent to which, when depreciable items are sold, profit is to he brought to account. It was said that s.59 specifically prescribes the tax effect of the sale of property which has been depreciated, so that other provisions of the Act under which profits might have been included in assessable income have no operation. Suppose a taxpayer buys a piece of property for resale, but pending resale uses it in his business; then s.54(1) of the Act says: "Depreciation during the year of income of any property, being plant or articles owned by a taxpayer and used by him during that year for the purpose of producing assessable income, and of any property being plant or articles owned by the taxpayer which has been installed ready for use for that purpose and is during that year held in reserve by him shall, subject to this Act, be an allowable deduction." If the property is "plant or articles owned by a taxpayer", depreciation may be claimed. Suppose the property has been bought for $20,000, but is, in the course of its use, depreciated down to $10,000; it is sold for $30,000. If the appellant is right, then the amount to be included in assessable income is that prescribed by s.59(2), which reads as follows: "Tf that consideration exceeds that depreciated value, the excess, to the extent of the sum of the amounts allowed and allowable in assessments for income tax under this Act and any previous law of ewe ee + ee yal yw 17. the Commonwealth in respect of depreciation, shall, subject to the succeeding provisions of this section, be included in his assessable income of that year." So $10,000, being the depreciation allowed, would come into assessable income. But if the Commissioner is right, a total of $20,000 comes into assessable income - $10,000 under s.59(2) and $10,000 under s.25 or (at relevant times) the former s.26(a). Assuming that it is suggested that the s.59(2) sum should be brought in, to the exclusion of that which would be included under s.25 or s.26(a), that must be on the basis that the former provision is specific.and the latter are general. But in my opinion neither may reasonably be described as more specific than the other. Further, the Commissioner's argument does not produce an absurd result: when the property in question turns out not to have depreciated at all, it does not seem irrational to require the tax saved under the depreciation allowance to be "paid back" in addition to taxing the profit on sale; there is no overlap. It follows that all the contentions made on behalf of the appellant fail and the appeal must be dismissed with costs. t certify that this and the {6 preceding Pages are a true copy of the reasons for judgment herein of His Honour Mr. Justice Pincus $ Associate Dated 2-12 37 oro sporam ?