Guinea Airways Ltd v Commissioner of Taxation [1950] HCA 60

High Court of Australia Dixon J. Latham C.J. McTiernan, Webb, Fullagar and Kitto JJ. Guinea Airways Ltd v Commissioner of Taxation [1950] HCA 60

ORDER Appeal dismissed with costs.

Cur. adv. vult.

Dec. 22 Dixon J . delivered the following written judgment:—

This is an appeal from an assessment to income tax for the financial year ending 30th June 1943 based on income derived during an accounting period of twelve months ending 28th February 1942. The appellant, an incorporated trading company, carried on the business of transporting passengers and goods by air in Papua and New Guinea. The base for its air services was Lae in New Guinea. There it had hangars workshops stores and other buildings. On 21st January 1942 the Japanese Air Force bombed Lae and the company's building stores and equipment were destroyed. Among the property destroyed were large quantities of spare parts for the airframes and engines of the company's aeroplanes. In accordance with the common practice of air transport services the company maintained a large stock of spare parts. The spare parts were stored in bins whence they were drawn as occasion required. In addition to the stock of spare parts for aeroplanes the company also carried at Lae a store of equipment and other things needed for the maintenance of the depot. This too was destroyed. In respect of its various losses as a result of the bombing at Lae the company claimed compensation under the National Security (War Damage to Property) Regulations. In pursuance of reg. 38 the War Damage Commission assessed the amount of the loss and recorded it. At that time under reg. 38 (3) the amount of compensation assessed and recorded was to be tentative only and did not become payable until the end of hostilities, when it might be reviewed. The law was afterwards changed by S.R. No. 4 of 1945. The amount at which the War Damage Commission recorded the loss in respect of spares for aircraft was £19,570 and the loss in respect of general stores £7,510. The aircraft stores stood in the books of the company at a figure which may be taken to be £25,361 and the general stores at £7,702. The difference is in the one case £5,791 and in the other £192, making in all £5,983. This difference the company claims to deduct from its assessable income in arriving at the taxable income of the accounting period. The accounts in which stood the respective figures of £25,361 for aircraft stores and of £7,702 for general stores consisted in the one case of an assets account known as the Aircraft Spares Account and in the other of an analogous account called the General Stores Account. When aircraft spares were purchased and taken into store at Lae the Aircraft Spares Account was debited with the cost into store consisting of the prime cost together with freight insurance duty and other charges. When spare parts were drawn and issued from the store for use, an amount was charged against running costs consisting of the cost into store of the spare parts so issued with ten per cent added. The corresponding credit of the amount so charged was divided into two. The added ten per cent was credited to an account called the Reserve for Depreciation Aircraft Spares New Guinea Account. The cost into store was credited to the assets account called the Aircraft Spares Account. The result would be that the debit balance of this latter account should show the cost into store of the aircraft spares which had been taken into the bins and had not been issued. The same system of accounting was applied to the General Stores Account. In the balance sheet of the company apparently it was the practice to show the total of the debit balances of the two accounts on the assets side under "Inventory: Spare Parts: Stores etc. less Depreciation". But at what figure does not appear, since the balance sheet in evidence is compiled as at 28th February 1942 after the bombing and shows the war damage claim as an asset. It was not explained why the War Damage Commission recorded the amount of compensation at £5,983 less than the book value of the spare parts and stores but there is something to suggest that the amount disallowed represents articles that had been in stock so long as to be obsolete or to have depreciated, possibly through deterioration.