) eemnte as ee ie : DAVIES & FEHON LTD. i COMMISSIONSR OF TAKATLON JUDGMENT. MR. JUSTICE ISAACS. This is an income tax appeal by Davies and Fehon Limited against a federal assesament for 'inoone tax for the financial year ending June 30th., 1928, 'that is, in respect of income during the year beginning July lst., 1922 and ending June 350th., 1923. The relevant Assessment Act is Ho. 37. of 1922, with applic- able anendments. The appeal comes pefore me under Seetion 51 A of the Ass- essment Act, by forces of Seation 16 of No. 28 'of 1925. The powers of the Court are very wide, extending even to the increase of the Assessment (eub-Seot ion 5). The appellant, however, is limited so far as his objection goes to the grounds stated (sub-Section 3). The only concrete matter remaining in issue is this:- Is the Company entitled to a deduction for the year in question of a sum of £12,698 as a bad debt ? _ : The Commissioner has disallowed the whole of it, and the Company claims the whole of it. The Company has the burden of establishing its right to all or some of that amount as a stitutory deduction for bad debts. The deduction is claimed primarily under Section 23 (1) (a) as @ "loss not being in the nature of loss of capital." (2) And as it is claimed as a "bad debt", it must be shown to come within thé exception mentioned in Section 25 (g), namely, "proved to ba such to the satisfaction of the Commissioner and "to have been incurred in and actually written off by the tax- "epayer in the year in which the income was derived." The appellant contends that the whole of the sum of £12,698 ie satisfies all those conditions. i The appellant also urged before me that it hae alternatively a right under Section 26 to asduct the sum from the assessable income otherwise taxable, beoanse it was a loss in carrying on a business separats from the business in which the other income was earned. The Commissioner maintains:- (1) That the loss claimed was a loss of capital; (2) That 1t was not a oss actually inourred "in gaining or "producing the assessable income"; (3) hat it was not "inourrea" in the year in which' the ineome was derived; (4) That it was not written off in that year; (5) That Seotion 26 is not open to the appellant in this appe&& in view of the tarms of the objection; (6) That, assuming Section 26 is open, the amount is not shewn to be a loss within the meaning of the Section. The matter presents some unusual complications, arising from the vagaries of the Company's business operations. I should at this point say something about the nature of the evidence. Section 39 makes the notice of assessment prima facie evidence in an appeal of this nature. That is, it throws the burden on the appellant to establish his right to the benefit he elains. it is apparent that the weight of the statutory evidence must vary according to the circumstances. The weight of all evidence is subject to that consideration. : (3) It was laid down a century and a half ago by Lord Mansfield in Blateh v Archer (Cowp. 63 at 65) that:- "All evidence is to "bea weightdaccording to the gwaf@ proof which it wae in tie "power of one side to have produced, and in the power of the "other side to have contradicted." fhe orucial facts affecting the issue in this appeal are peculiarly in the power of the S@ppellant to elucidate; and the burden of displacing the prima facie fores given by the Statute to the Commissioner's assesonent is correspondingly great, The Company could in my opinion have given much clearer and more definite evidence in explanation of the items in its balance sheet, and especially of the grounds of the objection. I do not meaat by thie to impugn the honesty of the two wit- nesses called, Mr Ross, a director, and kr Dunnett, a former accountant. Mr Ross, I am s&tiefied, gave the Court /eandidly all the information in his power, without any attempt to colour it. But that was information only of a very broad and general character, and though useful up to a certain point, was by no means definite on other important features. He admitted he did not know as mich about the business as Mar Dunnett. I presume he meant as to the detailed office working of the business in Sydney. Mr Dunnett, on the ohher hand, told me that ir Ross knew more about the advances in question than he did. Mr Dunnett's knowledge is not precise, and although I believe hs statéd only what he thought was corract, he was a little confused, his impressions as to a crucial matter varied, and he appeared to me ultimately to rely to a great extent on his inferences from the balance sheet and from what he was told. I think his evidence quite honsst, but I am unable to build 'vary much on it. The governing director, Mr Davies, and the second director, {4) Mr Hughes, who actually directed Mr Dunnett to write off the sum in question, were not called, though they were in Sydney. The Melbourne manarer, Mr Laver, who was in a position to know a good deal about the progress and condition at all essential times of the Australian Trading Company's affairs; was not called. Whoever framed the objection might have heen called to state the materials supporting it. Still, 1 have to make the best of the materials before me 80 as to arrive at the true position of affairs. And in this, Mr Ross, so far as his evidence has gone, has given reliable and substantial assistance. ' The appellant Company was incorporated on August 8th., 1903. Its authorised capital is £75,000, divided into 75,000 shares of £1 each. Of these, 50,000 shares were taken up many years ago, and the full amount on them has been paid up. At what date the full payment took place i do not know, but it is clear that it was prhor to the advances to the Australian Trading Company, end Be the share money went partly in payment for shares in other companies, and partly for general trading purposes. No allocation of paid up capital has ever been made to any specific purpose. The remsinipg 25,000 shares remained unissued up to September R2, 1923, when a special resolution respsoting their issue was passed. The objects of the Company as set ont in the Memorandum are #0 voluminous and detailed as to fall within the observations 4 of Lord Wrenbury in Cotman v Brougham (1918 A.c. at page 28). Mr Manning relies very strongly on paragraph (4), which states one of the objects to be:- "To advance, deposit or lend "money, securities or property to or with such persons or com- "-panies, and on such terms as may seem expedient." (5) That gives much point to Lord #renbury's distinction between "purposes" and "powars", a distinction of somes importance here. Ho doubt paragraph (4) clears the ground as to ultra vires bat it by no meanes settles the question as to Section 26 of the Assessment Act. For many years the Company carried on business as a wholesale timber merchant, having no business premises except offices. The war made a great difference. The timber business wae relinquished for at least a couple of years, and the Company has not resumed the wholesale business. On relinquishing the wholesale timber business, the Company started on another and direct 'Pie1a of enterprise. It purchased shares in other companies and "paid for them partly, thst is, more than half, out of bank overdraft. xekug It may be that at fbrst advances were made on an ordinary footing, bat I am not informed ag to this. At any rate, if that were 80, the idea was soon grasped by the Company that by purchasing sharss in controlling numbers, the appellant Company could virtually annex other companies and carry them on as an investment. For instances, when in January 1920 there were only 746 shares issued in the Australian Trading Propristary Company, the appell- ang Company consented to a maximum edvande of £4250 on the terms (among others) that it should receive 750 new shares and should have a majority of nominees on the Board. In the Australian Commeraial Company in about 1916 or 1919, the appellant held 11,825 shares at £1 sack, thers bsing only 6 other shares issued. The Austr&lian Commereial Company really belonged to the appellant Company. To speak 'of advances to such companies in such cire mstances may he legally correct, but from a business standpoih the word ie insufficient and misleading. f ii i (6) Mr Ross was quite right in calling the combined system of share purchase and advances a system of investment. The advancee, be it understood, were not made in the ordinary way, in a large sum, — leaving the disposal to the porrower. They were made, for tre most part ot least, by chequas drawn by the appellant Company on its bankers to pay current 'expenses of the subsidiary companies as those empenses arose. i asked Mr Ross:- "What do you mean by an investment?™ A.: 'Buying shares in the Company and making advances to it, as 'the case may be." Q.: "What were the advances for?" A.: 'For the trading purposes of that particular company.' Q.: "Were you earring on these companies or carrying on your "own Company?" A.: .'We thought we were carrying on the other 'companies. to some extent, but we made a mistake.' Ho doubt legally the appellant's status in the other com- panies was that of shareholder, and legally the advances were mde in the outside character of lender. Bat when we coma to consider the nature of the transaction of loan, the actualities of the situation as a whole are inport- anf. Sither the transactions -- numberless transactions of ad- vances by way of cheques. -- were part of a systematic investment in that company, that baing the dominant character of the matter - or else they wore part of a larger. systematic business of lend- ing money to companies --- not one, but. several. In tha first alternative the advances were not in a "business" of any kind belonging to the taxpayer, and the bad debt was not @ business loss within the meaning of Section 26. In the second alternative the mere fact of this amount being the gum total of a number of bad debta, would not suffice to constitute them a "Loss in earrying on the business". For all that appears, the f i '3 i ' ty } {7) relevant business may have besn on the whole a prosperous one for the relavant year, or at all events, the loss may not have been so great. Certainly, dividends were receéved from other ecompan= ies, and these would in the second alternative go in the profit and loss account of the assumed business. The intrinsic value of the shares in the various 'companies to which the business ex- tended does not appear. It would be absurd to say that the dealings with each company constitutes a separate business within the meaning of Section 26. I therefore put all claim based on Section 26 out of consid- eration, even if it be opsn.in view of sub-Section (3) of Section 5L{A). I then have to deal with the claim for deduction on the first ground, which as 1 think was the only ground relied.on in the first objection, that is, the ground founded on Section 23 (1) (a), and not excluded by Section 25 (g). ly Rose progeeded to state that looking at. the. balance. sheet he could emt' aay that besides the scheme of..investment just mentioned, the appellant Company. in 1923 re-entered the timber business, nécsositating premises. The balance sheet for the. income year relevant to this oase. shows that business to be of considerable magnitude, the stock in hand being £31,621, and the goodwill at. £11,000. No doubt the balance sheet, of, the Company mingles the two sets of ebdechuons so as to exhibit its total assessable income, but that is as compatible with distinctness of businesses in the case of a company as in the case of an individual. The profit and 'Lose account however, shows the grose profit and commission from the timber business to be £38,778/7/7, while the dividends from other companies were £3,593/14/7, the two sums making up the total gross income of 242,372/2/2. . Further, the dividends have been excluded under Section 16 (b) (111), apparently because divided. (8) The first essential to the appellant's successis to establish that the sum claimed, or some part of it, is & "loss", not being a loss of capital. If paragraph (4) of the Memorandum be regarded as a distinct "object" in the proper eense, and if the advances to the Australian Trading Company could be considered as mere advances, unconnected with any relation but that of debtor and creditor -- as in the ease of banker and customer <= then I should be disposed in the circumstances to apply the observations of Lord Atkinson in Farmer v. Scottish Investment Company (1912 A.C. at page 127), , and treat the monsy advanced as not capital. Had the same money when borrowed from the bank been applied to the timber business and lost, it would not have been capital of the appellant Company. Applied, as it was, to the business of tha Australian Trading Company, it was not capital of that Company. As I regard the operations of the appellant Company in relation to paragraph (4), I think the Company ooutinae' its powers, such as in paragraphs -(m) ana (y), tna eystamatio exten sion of activities. in a somewhat unique department which Kr Rosa called "investment by buying shares in a company and making - "advances to it as the case may be", and which may, I think, appropriately be described as "Investments in Company Undertakings". The total debt or accumlated indebtedness of £12,698 was entirely uneoonnected with the assessable income ineluded in the return, except so far as it formed part of ths investment scheme adverted to. It was not "incurred in gaining ér producing the assessable "income" -< so far as the tither business was concerned, ior except as part of one general investment business, was it so incurred in relation to the dividends ineluded@ in the return and axcluded from the assessment. i {9} _ if this ease. depended upon whether the words in Section 23 (1). (a), relied on by the Commissioner, attach themselves to the word "loss", I should, in view of the case of the Allied Assurance Company (29 C.L.R., 424), decline sco to hold on my own respons- ibility, but should refer the matter to the full Court. Farther, the application of Seetion 25(h), if vital, would be sufficiently doubtful to induce me to take. the some course. Assuming, however, but certainly without so nolaing, that the debt is a "loss" within the meaning of Section 23 (1)(a) ana Section 25(h), it is still a "bad. debt", and the appellant. mst bring it, if it can, within the amidettan. arcejetion, The word "incurred" has been much debated with a view to allocating its being "incurred" to the income year. Mr Manning contends "ineurred" has no reference to the origination of the debt, but to its existence as a "bad debt". I nesd not determine that qusstion, particularly os the word is found in other Sections, notably in Section 23 (1){a). _ And the reason I need not determine it is because, assuming the interpretation put upon the sub-Seetion by Mr Manning to ba correct, I am not only not satisfied that the debt became a -—< a} shar in a businass sense or in any stricter legal api ies arte tonttils, a Arico, Legal Aluse — sense, — we the year in which the income was derived, but I am gatisfied that it was in fact a "bad debt" before that year commenced. Deroet I have no distinct, or indesd, any evidence as to the state of the Australian Trading Company, apart from the admission that the debt is wholly uncollectable. Bat Mr Manning stated certain matters as to ite progress and state, which I took to he acquiesced in with qualifications. 'Mr Manning eaid:- "As.a.matter of fact, after the appellant {10) "Company commenced making advances to the Proprietary Company, "the latter got into rather deep water, and the result was that "only one actual debit for interest was made to the Proprietary "Companys .«cseeeeessthe Proprietary Company had varying Finds of "fortune up to the year 1923, and ultimately went into liquidation. "The Company started to sink in 1921, and ultimately went down." Yr Cohen said:- "It has not actually veased to exist; it "is only water-logged, as a matter of facty it has not been "wound up." ; The Proprietary Company was virtually carried on by the appsllant Company. Not only does this appssr from the oral evidences, but it is transparent from the Melbourne ledger entries pat in, Sxhibits "p" and "a". Exhibit "D" 1s an account ealled "Australian Tading Company", headed "General Account". it does not commence until March 1,°1920, though the agreement was made in the previous January. It consists mostly of ord- imary business expenditure, it includse somes advances, and by May 11 the debit reached £5,090 less 1/3. On that date the deht of £5,000 was transferred to Sydney, leaving the Helbourne account elear. By the ent of May the balance was "Hil". & gap then occurs in the account until July 1920, when in another folio the general account is resumed, and continues to April 1923. : Bat two significant entries appear, under date June 30, 1982. One is: : 'To D.& F. Revarse eeerenef4,825/11/4 (amount in debit colum) (In final column). eDe.£4,825/11/4." The other is: "BY Ded Fe Bad Debtye...es24,825/11/4 (amount in credit column) (In final Ooluan)....« Ru. ' (12) That so far clears the Australian Trading Company's Melbourne General Account. The word "reverse" hig reference to a previous entry of June 27'D.RY" and in credit column £4,825/11/4, leaving a final valance of 26/11/9 owing on this account by the Proprietery Company. That sum was cleared by the next entry, a cash credit of £6/11/9, leaving the account stand at "nil". A pencil note on the line of June 27th says "Sad Debt written off." The rest of the £12,698 414 not find ite way into tha account. The sum of £4,825 include! a gum of 2598 for interest up to December Sl, 1921. Trading it appears from Exhibit "E", headed "Australian txcupriekerg "Sompany Proprietary Ltd. Advance Acoount", that in June 1920 a debit was entered up £4250, the balance of the £5,000, namely, £750, having bean appropriated to purchasing 750 shares. One item of £85 intsrest was debited on June 30th., 1920, and written off at the end of December. No intereat is charged on the advances to make up the £12,698. The advance account shows nothing advanced. during 1922, the last item being £6/5/- on July 21, 1921, and this is borne out by Sxhibit "Cc", a copy of the Sydney Ledger Account with the Australian Trading Company. On July 2lst., 1921 the Advance Account showed an indebted- nees of 215,697/19/1. On June 27, 1922 an entry in ink stands t hus: "By Ded Fo ccccccssevevesecceccecsecesss £12,697/19/1 (leaving in the final column)..esecse 3.000/-/-." I would understand by that, evan apart from further elucid- ation, that of the £15,697/19/1, Melbourne, on Juhg 27,1922, thought £12,697/9/1 worthless, and that £3,000 was so far not { § | t | t (12) to be regarded ae bad, and that the larger sum was transferred to Sydney Head Office to be dealt with there. In penoil.is a note along this entry, and 4s coming from the possession ofthe appellant, and unexplained, I read it. It sayst- "Transfer to D.& F., Sydney A/o Bad Dedt", simply : he fe eke Mu : ¢ mexakxy confirms the conclusion I would draw without the pencil note. The next entry is June 30th., 1925; "P. and Ls Bad Debt £35000". The evidence shows that there was' 'pereonal guarantee, which at firet was thought to save the 23,000, but ultimately this was abandoned too. Affirmatively, from the 'olrounetancee proved, and negatively from the absence of any sufficient explanation by the appellant Gompany, 1 entertain not the least douht that ite management of the Proprietary Company had not saved that Company, but that the Proprietary Company had rapidly sunk during 1921 and 1922, previous to June 27 of the latter year, and tmt not only had my hope of interest but also -- save what the personal guarantee might ve worth up to £3,000 -» the prinotpal advanced up to £12,697/19/1, had long before June 27, 1922 irretrievably gone. Indesd, from the early part of 1921, the tranefusion of financial hood had practically censed, ané the Proprietary Company was with compara- tively slight, and very temporary assistance, allowed to fate away. The actual writing off at the Head Office took place as to the £12,698, on June 30 1923. The Melbourne office entry of "bad Debt, £4,825/11/4" in the general account, is not only evidence of bad debt auafnatex pro tanto, and of genersl badness of the whole indebtednese, but might possibly be considered a oem cn (13) writing off pro tanto also. However, 1 do not rely on that ee the writing off. the Commissioner admits that the debt is a bad debt and has been written off, but does not admit the date of writing off. I accept the evidence for the appellant that Sydney Head Office wrote the amount off, £12,698, on June 30 1923. But I cannot accept the view pressnted by the appellant that the whole £12,698 was a perfectiy good business debt up to the year beginning July.1 1922 and ending June 30 1923, and suddenly in that year became bad, and wae written off et ite end. The real loss occurred in my opinion, as 1 have said, a cone siderable time before -- certainly long before the end of June 1922, and that,in the absence of the Commissioner's allowance, ends the matter against the appellant. Tre appeal 1 chormueced with | }