Commissioner of Taxation (Cth) v Midland Railway Co of Western Australia Ltd [1952] HCA 5

High Court of Australia Dixon, Webb and Fullagar JJ. Commissioner of Taxation (Cth) v Midland Railway Co of Western Australia Ltd [1952] HCA 5

ORDER Appeal dismissed.

Cur. adv. vult.

March 6 Dixon J.

The question for decision upon this appeal is whether the respondent company is entitled to a deduction from its assessable income of an amount expended in redeeming certain reversionary certificates which it claims to have issued in respect of arrears of interest on debenture stock.

Kitto J., from whose decision the Commissioner of Taxation brings this appeal, held that the amount expended was a proper deduction, subject to its being shown how much of it was paid in redemption of certificates which actually did represent such arrears of interest.

The year of income with which the appeal is concerned is that ending 30th June 1944 and the amount paid by the company during the year in redeeming reversionary certificates was £2,966. To explain the nature of the payment a short account of a portion of the financial history of the company is necessary.

The company, which is incorporated in England, carries on its business in Western Australia. In the year 1902 the affairs of the company were re-organized and as part of a plan of arrangement it created £1,000,000 of 6 per cent cumulative income debenture stock of which it issued an amount of £973,723. This was a conversion of a then existing issue of 6 per cent debentures which ranked as a third charge. The new cumulative income debenture stock ranked for interest as from 30th June 1898 but the interest was payable only out of the company's surplus revenue after providing for interest on certain 5 per cent stock and for prior revenue charges. Apparently there was no such surplus revenue in the next decade, for by 30th June 1910, the unpaid interest upon the 6 per cent cumulative income debenture stock amounted to £701,080. Another plan of arrangement was submitted to the holders of debenture stock and of shares. As part of this plan the holders of the £973,723 cumulative income debenture stock were to take (1) a second mortgage debenture stock to the amount of £600,000 being 61.62 per cent of the amount of their then capital holding; (2) £373,723 of unified ordinary shares or stock, being the remaining 38.38 per cent of the amount of their capital holding; (3) £146,058 of the unified ordinary shares or stock as a premium of 15 per cent of the amount of their then capital holding; (4) a new reversionary certificate for the amount of £701,080 representing all arrears of interest to 30th June 1910.