High Court of Australia Barwick C.J. McTiernan, Mason and Jacobs JJ. AL Hamblin Equipment Pty Ltd v Commissioner of Taxation (Cth) [1974] HCA 44 ORDER Appeals Nos. 9 and 11 of 1974. Appeals allowed with costs and cross-appeals dismissed with costs. Orders of Stephen J. set aside and in lieu thereof order that the appeals to Stephen J. be allowed with costs and assessments remitted for adjustment. Appeal No. 10 of 1974. Appeal allowed in part and cross-appeal dismissed. Order of Stephen J. set aside and in lieu thereof order that the appeal to Stephen J. be allowed in respect of the assessment relating to the Caterpillar 922 Loader but otherwise dismissed and that the assessment be remitted for adjustment. Respondent to pay half of the appellant's costs of the appeal to Stephen J. and to this Court and the whole of the costs of the cross-appeal. Cur. adv. vult. The following written judgments were delivered:— Nov. 4 Barwick C.J. The facts with which these three appeals are concerned are set out in detail in the reasons for judgment of other members of the Court who participated in the hearing. The basic structure of the facts which relate to the major matter in controversy may be stated as follows. A taxpayer for the purposes of his business had leased certain machinery and had other machinery on hire-purchase. Finding it expedient, if not indeed necessary, for the purposes of his expanding business to replace such machinery with other plant more suitable to that business, the taxpayer decided to acquire the use of that other plant either by lease or by hire-purchase. He also decided to "trade-in" the existing plant as part of the consideration for the acquisition of the right to use the new plant. The lease under which part of the existing machinery was held nominated the residual value of such machinery as at the termination of the term of the lease. It was contemplated that the lessor of the machinery would sell it at the expiry of the term and that the lessee would pay to the lessor, in addition to the instalments of rent for which the lease provided, the deficiency, if any, between the realized price and the nominated residual value of the machinery. As lessee the taxpayer had no right to purchase the machinery, but it was open to him to negotiate the purchase of the machinery during the currency of the term, so that, by payment to the lessor of the nominated residual value plus the amount of the instalments of rent accrued and unpaid and the amount of the instalments yet to fall due less an allowance for the accelerated time of payment of the latter, the taxpayer became fully entitled to that machinery. Under the hire-purchase arrangements the taxpayer had the right of purchase of the machinery and, meantime, by virtue of statute, he had a proprietary interest in that machinery — see ss. 1(5) and 15 of the Hire-Purchase Act of 1959 Q.. Having decided to trade-in the machinery the taxpayer ascertained the trade-in allowances which would be made for the various items of machinery by the persons from whom he intended to acquire the use of the new machinery. The taxpayer then with the lessor's concurrence acquired the lessor's interest in the leased machinery by making the payments I have described, and duly exercised the option to purchase under the hire-purchase agreement. As I understand the evidence in the case, though it was not specifically directed to the point, the taxpayer did not first terminate the lease of the machinery by surrender, and then acquire the machinery as a purchaser who had no right to its possession. I am unable to accept that view of the matter: it would, in my opinion, be commercially unreal to so conclude. Whilst it may be, and I find no need to resolve the point in order to decide these appeals, that the lessee of a chattel has a proprietary interest in it derived from the lease, it is clear that the lessee has the right to immediate possession of the chattel, which whilst the lease is on foot the lessor has not. The lessor's title to the chattel, even if fully proprietary, is thus limited to the extent that he has no right to its immediate possession. Accordingly I regard the transaction of the taxpayer with the lessor of the leased machinery as the acquisition of the lessor's interest in the chattel by a person having and retaining the right to its possession. I do not think that the price paid to the lessor, that is, the nominated residual value of the chattel plus instalments of rent less an adjustment for accelerated payment, is indicative of a surrender followed by a purchase of the machinery from a lessor having the right to its immediate possession. On the contrary, I think the composition of the payment made to the lessor indicates the contrary. The trade-in allowance with respect to the machinery was in each instance greater than the sum paid to the lessor or to the hirer under the hire-purchase agreement. The Commissioner of Taxation assessed the taxpayer to income tax in respect of this difference on the footing that it was a profit arising from the sale by the taxpayer of property acquired by it for the purpose of profit-making by sale within the ambit of s. 26(a) of the Income Tax Assessment Act 1936-1970 (the Act). Upon appeals to this Court against the assessments, the Justice who heard the appeals upheld the assessments on that footing. As I have indicated earlier, there are before the Court three appeals. Whilst their facts are more complicated than the facts I have outlined such complications do not, in my opinion, affect the result which should follow from the application of the Act to the basic facts which I have outlined. Included in the matters in dispute in the appeals is a sum of $5,000 paid to the taxpayer by a machinery merchant in connexion with the lease of machinery not to the taxpayer but to another person. As to this sum, I am in agreement with my brothers Mason and Jacobs in thinking that in the circumstances of the case, the receipt of that sum by the taxpayer was a receipt of income within the operation of the Act. Accordingly, the appeal in respect of that sum, in my opinion, should be dismissed. I turn now to discuss whether the ground upon which the taxpayers have been assessed in respect of the acquisition and trade-in of the machinery falls within s. 26(a), that is to say, whether the transactions with the lessor and the hirer constitute acquisitions of property for the purpose of profit-making by its sale, so that the difference between the amount of the trade-in allowance and the amount paid to the lessor or the hirer respectively constituted a profit falling within s. 26(a). I have limited the expression of the problem to the terms of the first branch of s. 26(a), as in my opinion if the matter cannot be brought within that first limb it cannot be brought under the second limb of the section. Indeed it is not unimportant to observe that in McClelland v. Federal Commissioner of Taxation [1] , their Lordships seemed willing to accept the proposition that at least in a case of the present kind the second limb of s. 26 (a) was only an alternative way of presenting a case under the first limb. 1. (1970) 120 C.L.R. 487. One approach to the solution of the question I have posed is to remember that in the administration of s. 26(a) there must be an identity between that which is acquired for the appropriate purpose and that which is sold so as to produce a profit. So much I think may be securely taken from the decision of McClelland v. Federal Commissioner of Taxation [2] . If I am correct in my analysis of the actions of the taxpayer in getting in the lessor's interest in the leased machinery together with the interest of the hirer under the hire-purchase agreement in the machinery subject to that instrument, that which the taxpayer acquired from the lessor and under the option to purchase is not the same thing which was subsequently traded-in upon the acquisition of the use of other machinery. 1. (1969) 118 C.L.R. 353, at p. 359; (1970) 120 C.L.R. 487. It seems to me that it can scarcely be denied that in the case of the hire-purchase machinery the taxpayer already had a proprietary interest in the machinery which he did not acquire at the time he exercised the option to purchase. There can be no suggestion that he originally entered into the hire-purchase agreement, so obtaining the proprietary interest for which the statute makes provision, with any intention of selling it in a profit-making operation. What he traded-in clearly was not what he obtained by his exercise of the option to purchase. But it is said that because a lessee of a chattel has no proprietary interest in it, the case is different in relation to the leased machinery. However, in my opinion, it does not matter that the right which the taxpayer had in relation to the leased machinery might not be regarded as a proprietary interest. It was undoubtedly a possessory right of value and something which was carved out of the totality of the rights proprietary and possessory which the owner of the chattel otherwise would have had. In my opinion, the possessory right of the lessee, as I have said, not being surrendered but on the contrary being retained, is sufficient to deny the proposition that that which the taxpayer as lessee acquired from the lessor was what precisely he used as a trade-in on the acquisition of the use of the other machinery. In my opinion, the application of s. 26(a) to each of the two instances produces the same result. In each case, it seems to me that that which was got in was not that which was traded in. On that ground alone the appeals in connexion with those transactions should be allowed. There are, in my opinion, however, two other reasons why such a case of which I have outlined the basic facts does not come within s. 26(a). In the first place, their Lordships of the Privy Council in McClelland v. Federal Commissioner of Taxation [3] seemed, as I read their reasons, to have concluded that as to both limbs of s. 26(a) the transaction of acquisition and resale must exhibit features which give it the character of a business deal. This must mean, in my opinion, that the taxpayer in acquiring the property has the purpose of trading in it or with it and of doing so as thereby to make a profit. However much their Lordships' reasoning in this regard may have been affected by concepts more appropriate to the system of taxation in the United Kingdom than to that of this country, their conclusions are binding on this court: effect must be given to them. This element of commercial dealing must be present if it is to be concluded that the acquisition of the property was for the purpose of making profit by its resale. I find this a satisfactory implication of the section which without it can be driven to absurd lengths. 1. (1970) 120 C.L.R. 487. Now it seems to me that the getting-in by a taxpayer of an outstanding interest in a chattel to which he either has the right to possession or in which he has a proprietary interest in order that he might use the chattel as a means of financing the purchase or hire of another chattel does not exhibit any such feature. The method of getting-in the outstanding interest in the chattel is adopted as a means of effecting the most beneficial realization of that which the taxpayer already has rather than of trading in or with the chattel. Though such a procedure may be said to involve a purchase and a resale it is not, in my opinion, in any real sense of that description a business dealing in or trading with the chattel. It is no more than the choice of the most beneficial way of realising or using that which the taxpayer already has. These considerations furnish to my mind a deeper reason for refusing to support the assessments. The actions of the taxpayer which I have described do not, in my opinion, warrant the conclusion that within the scope of s. 26 (a) he acquired property for the purpose of profit-making by its resale. I need hardly add or emphasise the feature upon which I laid stress in McClelland's Case [4] , namely, that it is not every gain which is properly called a profit within the meaning of the Act: a profit is an excess over cost. If one had to compare the trade-in allowance with some cost in order to determine whether there was a profit I cannot think that the payment of the instalments either of rent or of hire under the hire-purchase agreement could be wholly ignored. 1. (1969) 118 C.L.R. 353. Lastly, it seems to me that it is not proper to analyse the trade-in allowance as a price obtained on resale. In this respect I would not wish to add anything to what my brother Jacobs has written in his reasons for concluding that "the trade-in is not a sale at the price allowed on the trade-in". The reality of the situation is that the trade-in is a device to obtain a reduction in the effective price of the article to be acquired or hired. For all these reasons I allow the appeals except the appeal as to the payment of $5,000. McTiernan J. I agree in the reasons stated in the judgment of the Chief Justice just published. Mason J. These are three appeals by the appellants against the dismissal by Stephen J. of appeals against assessments to income tax. Two appeals are by A. L. Hamblin Equipment Pty. Ltd. ("the Equipment company") in respect of its assessments to income tax for the years ended 30th June 1968 and 30th June 1969. The third appeal is by A. L. Hamblin Constructions Pty. Ltd. ("the Construction company") in respect of its assessment to income tax for the year ended 30th June 1970. By his assessments the Commissioner increased the assessable income of the Equipment company as returned for the year ended 30th June 1968 by an amount of $16,812 representing the profits made by the company on the sale of a John Deere scraper ($10,768) and a Caterpillar 955 traxcavator ($6,044), and for the year ended 30th June 1969 by an amount of $17,160 representing the profit made by the company on the sale of a Caterpillar D9 tractor. By his assessment of the Construction company for the year ended 30th June 1970 the Commissioner increased its assessable income by $19,455 representing the profits made on the sale of a Caterpillar 922 tractor ($10,800) and a Le Tourneau scraper ($3,655) and the amount of a credit of $5,000 granted by Hastings Deering (Qld) Pty. Ltd. ("Hastings Deering"), a vendor of earth-moving equipment, to the account of the Construction company with that company. The appeals raise issues as to the correctness of the inclusion of these amounts in the assessable income of the taxpayers. With the exception of two items, namely, the profit of $10,800 made by the Construction company on the sale of the Caterpillar 922 and the credit of $5,000 received by the Construction company, the amounts in issue depend upon similar circumstances and they may be conveniently considered together. However, at the outset it is necessary to say something of the relationship which existed between the two companies and of the business activities in which they were engaged. The two appellants are associated companies. Their principal business, or more accurately the principal business of the Construction company, is contracting work which, for the most part, consists of earth moving, road construction and land clearance. Mr. A. L. Hamblin is the permanent governing director and manager of each company and he is the guiding spirit behind their activities. Until 30th June 1968 the activities of the two companies were so arranged that the contracting work was undertaken by the Construction company which used earth-moving equipment made available to it by the Equipment company which took on lease or hire the equipment required by the Construction company for its business. Although the reasons which led the companies to adopt this arrangement of their activities is not altogether clear from the evidence, it may be safely assumed that it was thought more prudent from a business standpoint to vest the principal rights to valuable equipment in a separate company and that there was a taxation advantage in the Construction company treating the rental payments for the use of the equipment (which it paid to the Equipment company) as expenses incurred in the production of its assessable income. However, in 1968 an alteration in this arrangement of the activities was forced on the two companies by reason of Mr. Hamblin's decision that the Construction company should become sub-contractor to Transfield (Qld) Pty. Ltd. ("Transfield") in the construction of the Fairbairn Dam, a large dam near Emerald in Queensland, for the Irrigation and Water Supply Department. The project was much larger than the projects in which the companies had hitherto participated, with the consequence that a very large quantity of earth-moving equipment was required. The Department was willing to finance the acquisition of this equipment but only on the footing that it dealt directly with Transfield. As a result the equipment was acquired by Transfield, in part, as will appear, from Hastings Deering. Transfield then entered into two agreements, one with the Construction company by which that company hired the equipment from Transfield, the other with the Equipment company by which it agreed to purchase the equipment from Transfield on completion of the Fairbairn Dam. In relation to equipment required for other projects it was decided that the Construction company would take it on lease or hire-purchase direct from finance companies without the interposition of the Equipment company. This decision led to the trade-in of old equipment formerly leased by the Equipment company as part of the consideration provided in respect of new equipment taken on lease or hire-purchase by the Construction company from finance companies. The three units sold by the Equipment company which are the subject of the two appeals by that company were traded in on the acquisition of new equipment for the Construction company. As might be expected, the evidence reveals that the profitable operation of a business of the kind in which the two appellants were engaged depends for its success on the suitability of the particular equipment which the contractor is using for the work which he is undertaking. Thus, it often transpires that when a contractor has completed one job and is about to commence another, he will in accordance with sound business judgment dispose of equipment previously in use and acquire in its place new equipment better adapted to the work to be undertaken. Indeed, it sometimes happens that it is prudent or necessary to replace old equipment with new equipment in the course of a particular job. In this case it is apparent from the evidence, which is not the subject of challenge by the Commissioner, that the equipment in issue was disposed of by the appellants for sound business reasons and that it was not sold merely because the taxpayers wished to make a profit. The three units sold by the Equipment company and the Le Tourneau scraper sold by the Construction company were held, not under hire-purchase agreements, but under lease agreements for a fixed term. The lease agreements made provision for the payment of a monthly rent and for the sale of the equipment by the lessor on the expiration of the term. They provided that if the sale price realized was less than the sum specified in the agreement as the residual value of the equipment the lessee was to pay the deficiency to the lessor. On the expiration of the term the lessee was at liberty to enter into a fresh agreement for lease of the equipment; alternatively, the lessee might allow the lessor to sell the equipment, or the lessee might before the expiration of the term negotiate a purchase of the equipment on the basis of the residual value plus the sum of the future rental payments less an allowance for acceleration of payment. The Caterpillar 955 was on lease to the Equipment company for two years from 18th July 1967. In March 1968 it had not been in use for some time and it was not needed for future work. The John Deere scraper was also held on a two-year lease which commenced on 11th August 1967. It was too small for the work required of it and it was not in good condition. The D9 tractor was on a two-year lease expiring on 6th July 1969. In June 1968 it had developed engine trouble which could not be remedied promptly at a time when a tractor in working order was urgently needed. It was decided to dispose of all three units and trade them in on the purchase of new and more suitable equipment. To this end negotiations were undertaken with the lessors to purchase the leased equipment for the residual value plus instalments of rent accruing due in the future, less an allowance for accelerated payment. The course determined upon had obvious advantages over other alternatives. To leave the lessors to sell the equipment involved the risk of delay and difficulty in finding a buyer which might expose the taxpayer to loss of the allowance for accelerated payment of future instalments (or part of it) and to liability for a deficiency between the residual value and the sale price. There could be no guarantee that the lessors would energetically seek an advantageous sale because they could always look to the taxpayer to make up the deficiency. On the other hand, the taxpayer had no entitlement to participate in any surplus over the residual value which might be obtained on a sale by the lessors. A trade-in of the equipment offered a better prospect of benefit than a sale by the taxpayer to a third party. According to the evidence the allowance on a trade-in is inflated; it involves an element of subsidy which no other buyer can be expected to pay. Moreover, a sale to a third party would involve delay and difficulty in the finding of a suitable buyer. The profits made on the sale of the three units by the Equipment company represented the difference between the amount of the allowance made in respect of the trade-in of the three units and the amount which the Equipment company paid to the lessors of the units as a pay-out figure for the purchase of the units. The circumstances in which the Construction company disposed of the Le Tourneau scraper were similar, save in two respects. First, the scraper which had been leased to the Construction company was traded in as part of the consideration for the acquisition of new plant and equipment by Transfield. Secondly, the Construction company was the intended lessee of the new plant and equipment. The profit of $3,655 reflected the difference between the value allowed on the trade-in and the pay-out figure negotiated by the Construction company with the former lessor. I agree with Stephen J. that the profits made on the disposition of the four units to which I have referred constituted assessable income under the first limb of s. 26(a) of the Income Tax Assessment Act. In each case the taxpayer acquired the unit with the intention of selling it for more than the amount of the pay-out figure. The trade-in allowance on each unit was ascertained before the pay-out figure was determined and only after the pay-out figure was settled was a binding order for new equipment placed. Accordingly, the units were acquired by the taxpayers when there was a certainty that they would be disposed of at a profit and the acquisitions were made with that profitable disposition as the sole end in view. The certainty of the profit to be made was the principal advantage which the course adopted enjoyed over other alternatives open to the taxpayers. That the units were sold so as to provide the Construction company with new equipment was unquestionably a strong, and perhaps the strongest, motive for entry into the transactions, but to my mind this does not deprive the acquisition of the units of the immediate purpose with which they are otherwise stamped, namely, that of profit-making by sale. A matter of greater significance is that immediately before the acquisition of each unit the lessee was entitled to possession under the lease agreements which were still current. What was sold by the taxpayer in each case was an absolute title to the chattel, including a present right to possession. To bring the first limb of s. 26(a) into operation it must appear that there is some identity between the property acquired for profit-making by sale and the property sold. In Federal Commissioner of Taxation v. McClelland [5] Windeyer J. said: The first part of s. 26(a) applies to a transaction whereby a taxpayer sells any property he acquired for the purpose of sale. It applies whether he sells that property as a whole or in parts, and whether when he sells he sells to one buyer or to several buyers as joint tenants or tenants in common. But, as I read it, it does not apply when what is sold is essentially different in kind from the thing acquired. With these observations I agree. There is a question, therefore, whether the property sold was the property acquired for profit-making by sale. 1. (1969) 118 C.L.R., at p. 359; (1970) 120 C.L.R. 487. In each case the lease agreement constituted a bailment of the unit under which the lessee acquired a right to the possession and use of the chattel for the term of the lease, subject to payment of the rent and observance of the terms of the agreement. The precise character of the interest which the bailee acquires under such a contract has been the topic of debate. Halsbury's Laws of England, 4th ed., vol. 2, par. 1551, says of a contract for the hire of a chattel, "The proprietary interest in the chattel is not changed, but remains in the owner, although upon delivery the hirer becomes legally possessed of the chattel hired." Yet it has long been recognized that the possession which the hirer acquires and the right to possession which the contract confers enable him to maintain trespass and trover against third parties. The right of the hirer to recover against third parties rests, not on his liability to account to the bailor, but on his possessory interest in the goods (The Winkfield [5a] ; Eastern Construction Co. Ltd. v. National Trust Co. Ltd. [6] ). This interest has sometimes been described as a "special property" in the goods, to mark it from the "general property" or "reversionary interest" which resides in the bailor (Lee v. Atkinson [7] ; Webb v. Fox [8] ) and the view has been expressed, contrary to that taken by Halsbury, that a proprietary interest, less than ownership, is transferred to the bailee (see Paton, Bailment in the Common Law (1952), pp. 30-31). 1. [1902] p. 42. 2. [1914] A.C. 197, at p. 210. 3. (1609) Yelv. 172 [ 80 E.R. 114, at p. 115]. 4. (1797) 7 T.R. 391, at pp. 396-398 [101 E.R. 1037, at pp. 1040-1041]. For present purposes it is unnecessary to determine whether the possessory interest of a bailee under a contract for the hire of a chattel is a proprietary interest in the strict sense of that expression, however persuasive the case for this conclusion may be. Even if it be assumed that the first part of s. 26(a) cannot apply when a taxpayer, already having a right to possession of a chattel for an unexpired term, acquires for the purpose of profit-making by sale the reversionary interest of the bailor and then disposes of absolute property in the chattel for more than he has paid for the unexpired term and the reversionary interest, the appellants in order to succeed must show that all that they acquired in this case for the purpose of profit-making by sale was the reversionary interest which the finance companies had subject to the respective lease agreements. This in my opinion the appellants have failed to establish, the onus being on them to do so. The evidence as to the relevant transactions with the finance companies was equivocal, leaving open the possibility that the finance companies passed absolute property in the units to the appellants on the footing that the lease agreements should be treated as being terminated, the appellants not wishing to complete the contracts according to their terms and thereby continue the bailments. That, so it seems to me, is no less likely a view of the transactions as the alternative put forward by the appellants, namely, that the finance companies disposed of the reversionary interests in the units and that the sale price reflected the value of the reversionary interests, including an allowance for the instalments of rent falling due in the future under the lease agreements but not collected. The unsatisfactory state of the evidence is no doubt explained by the circumstance that the parties regarded this aspect of the transactions as having little importance. Be that as it may, all that we have is the oral evidence of the appellants' witnesses who spoke of "terminating" the lease agreements, evidence as to the payments to the finance companies and a letter from the finance company relating to the Caterpillar 955 which in my view throws no light on the question. Consequently I am of the opinion that the profits made by the Equipment company on the sale by it of three units of equipment were properly included in its assessable income and that the profit of $3,655 made by the Construction company on the sale of the Le Tourneau scraper was correctly included in its assessable income. The profit made by the Construction company on the sale of the Caterpillar 922 loader is to be distinguished in one respect only from the circumstances which attended the sale of the Le Tourneau scraper. The loader had initially been taken on lease for three years by the Construction company from Permanent Finance Co. Ltd. When the lease had run its course the Construction company entered into a hire-purchase agreement dated 13th November 1969 with the finance company in relation to the loader. The agreement specified a cash price of $5,000 with a deposit of $1,500 and twelve monthly instalments of $1,318. During the currency of the hire-purchase agreement the Construction company paid out the finance company on 28th June 1970 with a cheque for $2,998. It was allowed $15,800 by Hastings Deering on a sale or trade-in of the unit in connexion with the acquisition of new plant and equipment by Transfield, the new plant and equipment being the subject of a lease by Transfield to the Construction company. How the profit of $10,800 has been computed is by no means clear from the evidence, although it seems that it was arrived at by deducting from the sale price of $15,800 the amount stipulated as the cash price under the hire-purchase agreement. Nevertheless there is an obvious difficulty in bringing the profit within the purview of the first limb of s. 26(a). The evidence does not establish that at the date of entry into the hire-purchase agreement the Construction company intended to sell the loader at a profit or that it contemplated any such purpose. Indeed, Mr. Hamblin said, and there is no reason why his evidence should not be accepted, "When the lease terminated it was intended to keep that machine". The intention to sell the machine at a profit did not come into existence until some time later, during the currency of the hire-purchase agreement, when it was ascertained during negotiations with Hastings Deering that a substantial allowance would be made in respect of the sale of the loader. After $15,800 was settled as the amount of the allowance, the pay-out figure of $2,998 was paid to the finance company. Under cl. 10 of the hire-purchase agreement property in the loader did not pass to the Construction company until the moneys payable under the agreement were paid in full or, in the event of early completion, the provisions of s. 11 of the Hire-Purchase Act of 1959 Q. were complied with. The hire-purchase agreement did not bind the Construction company to buy and conferred on it an option to purchase exercisable by payment of the instalments in accordance with the agreement and the Act. However, when regard is had to the character of a hire-purchase agreement and to the rights which are conferred on a hirer under a hire-purchase agreement by the Act it is impossible to resist the conclusion that the hirer has a proprietary interest in goods the subject of such an agreement before he exercises his option to purchase by payment in full. Apart from the statutory equity conferred on the hirer by s. 15, which must be taken into account in the event of repossession and sale following repossession, s. 1(5) provides: Subject to this Act, the provisions of this Act shall notwithstanding any law to the contrary, be read as granting to the hirer a right in equity in or in respect of the goods comprised in the hire-purchase agreement based upon the amounts (including the deposit) paid or provided, whether by cash or other consideration, by or on behalf of the hirer under the agreement. The effect of this provision is to give the hirer an equitable interest of a proprietary character in the goods. It is an interest which may be lost or defeated or which may prove to have no value if the hirer does not complete the agreement, but that is not to the point here, the Construction company having paid out the finance company. If, in accordance with s. 1(5), the Construction company had acquired an equitable proprietary interest in the loader under the hire-purchase agreement before paying out the finance company, there was not a sufficient identity between the proprietary interest which it acquired from the finance company on 28th June 1970 when the cheque was paid and the absolute title to the loader which the Construction company passed to Hastings Deering for $15,800 to bring the matter within the first part of s. 26(a). Although the evidence as to the transaction which took place on 28th June 1970 is meagre, I infer that the Construction company thereby acquired the outstanding proprietary interest in the loader. In this case on completion of the hire-purchase agreement absolute title would pass to the taxpayer. The circumstances therefore more readily lent themselves to the conclusion that by paying out the finance company the taxpayer acquired the outstanding proprietary interest which it would have acquired in any event by completing the agreement. Finally there is the credit of $5,000. According to the evidence Hastings Deering would have allowed a direct discount to the Construction company in this amount had it been the buyer of the new equipment, having previously made purchases amounting almost to $1,000,000. This discount would not have constituted assessable income; its effect would have been to reduce capital expenditure otherwise made by the taxpayer. But it seems to me that the circumstance that the transaction, had it taken a different form, would not have given rise to assessable income, has no relevance to the question whether the allowance of the credit itself constitutes such income. In fact there was a credit of $5,000 received by the taxpayer in consideration of business which it had previously done with Hastings Deering. The receipt was therefore an incident of the contracting company's business. That it was considered by the parties to be a substitute for an allowance on the trade-in of equipment disposes of the notion that it was a gift and emphasizes its true character as a trade receipt arising out of the business relationship between Hastings Deering as a supplier of earth-moving equipment and the Construction company as the purchaser of such equipment in the course of carrying on its business as a contractor. In the result, therefore, I would dismiss the two appeals by the Equipment company; I would allow the appeal by the Construction company as to the profit of $10,800 made on the sale of the Caterpillar 922 loader but would otherwise dismiss that appeal. Jacobs J. There are three appeals from decisions of Stephen J. dismissing appeals against assessments to income tax. Two of the appeals to this Court are by A. L. Hamblin Equipment Pty. Ltd. in respect of the years of income of 1968 and 1969. The third appeal is by A. L. Hamblin Constructions Pty. Ltd. in respect of the year of income of 1970. A. L. Hamblin Equipment Pty. Ltd. — 1968. The Commissioner assessed the taxpayer for tax on profits which he determined were made by it in respect of the sale by it of two items of heavy earthmoving equipment. (1) Caterpillar 955. In circumstances sufficiently set out in the judgment of Stephen J. the company which had held this item under a lease agreement with Mercredits Finance Ltd. "paid out" the latter company so that it would have an absolute title to the item instead of its possessory rights as a hirer or lessee. The amount paid was $1,956. Subsequently, it transferred the unencumbered title to Hastings Deering (Qld) Pty. Ltd. in consideration of the latter company accepting the item in reduction by $8,000 of the total price of $64,753 payable to it by A. L. Hamblin Constructions Pty. Ltd. an associated company of the taxpayer company for a new Caterpillar Tractor D8H and associated equipment agreed to be sold by Hastings Deering (Qld) Pty. Ltd. to the associated company. In other words, the item was "traded in" against the new machinery purchased by the associated company. Then there was a novation or a re-negotiation of the sale of the new equipment whereby the Commonwealth Development Bank of Australia became the purchaser and the Bank in turn hired the equipment to the associated company under a hire-purchase agreement. The course of "trading in" was in accordance with a purpose for which the unencumbered title was acquired. The market value on a sale was considerably less than $8,000 and the difference represented a subsidy or discount on the price of the new equipment. (2) John Deere Scraper. The taxpayer company which had held this item under a lease agreement with Mercantile Credits Ltd. "paid out" the latter company so that it would have an absolute title to the item instead of its possessory rights as a hirer or lessee. The amount paid was $3,987. Subsequently it transferred the title to Hastings Deering (Qld) Pty. Ltd. in consideration of the last-mentioned company accepting the item in reduction by $12,275 of the total price of $61,365 payable to it by the associated company for a second Caterpillar tractor D8H and associated equipment agreed to be sold by Hastings Deering (Qld) Pty. Ltd. to the associated company and in consideration of the difference between this allowance and a total of $14,755 being paid in cash to the taxpayer company. There is some difficulty in ascertaining from the documentation the precise figures because on a novation of the sale whereby Hastings Deering Finance & Investment Co. Ltd. became the purchaser and on the hiring by that company to the associated company under a hire-purchase agreement the "trade-in" allowance is stated to be $12,657 and the cash price $61,150. The course of "trading in" was in accordance with a purpose for which the unencumbered title was acquired. The value of the item on a sale on the open market was considerably less than $14,755 and the difference represented a subsidy or discount on the price of the new equipment. A. L. Hamblin Equipment Pty. Ltd. — 1969. D9 Tractor. The taxpayer company which had held this item under a lease agreement with Mercredits Finance Ltd. "paid out" the latter company so that it would have an absolute title to the item instead of its possessory rights as a hirer or lessee. The amount paid was $4,340. Subsequently, it transferred the title to Hastings Deering (Qld) Pty. Ltd. in consideration of that company accepting a reduction by $21,500 of the total price of $93,120 payable to it by the associated company A. L. Hamblin Constructions Pty. Ltd. for a new Caterpillar Tractor D9G and associated equipment agreed to be sold on extended terms of payment by Hastings Deering (Qld) Pty. Ltd. to the associated company. In other words, there was a "trade-in". The course of "trading in" was in accordance with a purpose for which the unencumbered title was acquired. The market value on a sale was considerably less than $21,500 and the difference represented a subsidy or discount on the new equipment. A. L. Hamblin Constructions Pty. Ltd. — 1970. (1) Caterpillar 922 Loader. The taxpayer company held this item under the terms of a hire-purchase agreement with Permanent Finance Corporation Ltd. under which the cash price of the item was $5,000. The company exercised its option to purchase under the agreement and paid the outstanding balance of $2,998. Subsequently, it transferred the item to Hastings Deering (Qld) Pty. Ltd. under an agreement whereby, on Transfield (Qld) Pty. Ltd. instead of the taxpayer company as had originally been agreed purchasing almost one million dollars' worth of heavy machinery from Hastings Deering (Qld) Pty. Ltd. at the request of the taxpayer company for the purpose of leasing to the taxpayer company, Hastings Deering Pty. Ltd. would pay to the taxpayer company $15,800 for the item transferred. The value of the item was not $15,800 but was, on the estimate made by Hastings Deering (Qld) Pty. Ltd. at the time, $8,800. A purpose of the dealing with Hastings Deering (Qld) Pty. Ltd. in respect of the item was to obtain the benefit of the subsidy or discount by way of enhanced price for the traded-in item which the latter company would have allowed to the taxpayer company if there had been a trade-in. However, there was not a trade-in because the amount payable by Transfield (Qld) Pty. Ltd. for the new equipment was not reduced by any amount referable to the transfer of the item to Hastings Deering (Qld) Pty. Ltd. (2) Le Tourneau Scraper. The taxpayer company which held this item under a lease agreement with Mercantile Credits Ltd. "paid out" the latter company so that it would have an absolute title to the item instead of its possessory rights as hirer or lessee. The amount paid was $4,245. Subsequently, it transferred the item to Hastings Deering (Qld) Pty. Ltd. under an agreement in similar terms to that lastly referred to under (1) last above. The amount paid to the taxpayer company was $7,900. The same circumstances existed as are related under (1) last above. (3) $5,000 received from Hastings Deering (Qld) Pty. Ltd. Hastings Deering (Qld) Pty. Ltd. on the sale to Transfield (Qld) Pty. Ltd. of a further item of equipment for $130,645 in similar circumstances to those related under (1) last above agreed to pay and paid to the taxpayer $5,000. The payment was equivalent to and in substitution for the discount or subsidy which would have been given on a trade-in, but there was no trade-in. The question is whether any of these transactions resulted in assessable income of the taxpayer companies, either by way of income under s. 25 or by way of assessable income under s. 26. I shall deal first with the amounts referable to items in the nature of trade-ins. Before going to the more complicated situations which arise in respect of the present transactions, I would commence with the analysis of a simple trade-in situation where the article is not wholly in the ownership of the purchaser of the new article at the time when he determines to purchase the new article and in the course thereof to acquire or perfect his ownership of the article proposed to be traded in. The seller of the new article will not give direct discounts on his price but he will accept an article in part payment of the purchase price and will place a value on it for that purpose above its market value. The proposing purchaser, let us say, goes to his local rubbish tip and selects an appropriate article which has been abandoned there and by taking possession of it acquires title to it. He goes to the seller and offers it as a trade-in and the seller places a value on it well above its intrinsic value of nothing. He does this, as is well known, as a barely concealed discount against the price of the new article which is charged by him. Having acquired title to the article thus traded in he consigns it whence it came, the rubbish tip. Now I cannot conceive that the amount allowed by way of a trade-in is assessable income of the purchaser of the new article. It is true that he acquires the property traded in and it is true that he intends to transfer the title to that property for a consideration. But a trade-in is not a sale at the price allowed on the trade-in. It is a sale because it is a transfer of the title to goods for a consideration in money's worth. The consideration is the purchase of the new article at the nominated price and the acceptance of the old article in part satisfaction of that price to the extent agreed in money terms. Though there is in law a sale, a transfer of goods for a consideration in money or money's worth, the purchaser of the new article does not acquire the old article for the purpose of profit making by sale. He does not make a profit from the carrying on or carrying out of any profit-making undertaking or scheme. A purpose of obtaining a reduction in the effective price to be paid for goods or services of a capital nature is not a purpose of making a profit by the amount of the reduction. Indeed the amount of the reduction would only be regarded as a profit by those happy-go-lucky souls who regard a saving on one expenditure as money coming into their hands whereby they are justified in expending it as a profit earned by them. But we cannot regard the Richard Carstones of this world as applying the ordinary principles of business accounting or the ordinary notions of business. Now, of course, the simple case which I have taken is not any of the present cases and it is necessary to analyse the differences and to estimate their effect. In the cases of the Caterpillar 955, the John Deere Scraper and the D9 Tractor, A. L. Hamblin Equipment Pty. Ltd. had the purpose of obtaining a reduction in the effective price of the new capital goods intended to be purchased but the purchase was to be not by A. L. Hamblin Equipment Pty. Ltd. but by another company A. L. Hamblin Constructions Pty. Ltd. However, it does not appear to me that this fact alters the purpose for which the titles to the old articles were acquired. The companies were associated. They had the same governing director and the same shareholders and it does not appear that there was any purpose in the change of company except purposes of business management unrelated to the transactions presently being considered. The accounts between A. L. Hamblin Equipment Pty. Ltd. and A. L. Hamblin Constructions Pty. Ltd. were so drawn that the savings in the effective prices of the new equipment were reflected in the account of A. L. Hamblin Equipment Pty. Ltd. and not in the accounts of A. L. Hamblin Constructions Pty. Ltd. They could quite easily have been reflected in the latter way if A. L. Hamblin Equipment Pty. Ltd. had transferred the articles acquired by it to A. L. Hamblin Constructions Pty. Ltd. at the cost of acquisition. I have come to the conclusion that the fact that this was not done does not result in a profit arising under s. 26(a). There is no evidence which I can find which would indicate that a purpose of the transactions was to ensure that the paper profits — for that is all they were — would accrue to A. L. Hamblin Equipment Pty. Ltd. so that A. L. Hamblin Constructions Pty. Ltd. would be indebted to its associated company for the amount of them. That this is what happened is not enough. It is sufficient to raise a profit in the accounts of A. L. Hamblin Equipment Pty. Ltd. but in the absence of any evidence that the purpose was to raise such a profit the only purpose which can in my opinion be properly so described was to ensure that the companies obtained the benefit of the artificial prices allowed by way of discount on the trade-ins. If the companies had been unassociated an inference could perhaps be drawn that the purpose or the main purpose of A. L. Hamblin Equipment Pty. Ltd. was by the arrangements to take the profits which were reflected in its accounts. But the close association of the companies makes the drawing of such an inference impossible. I shall next deal with the Le Tourneau Scraper the title to which was acquired by A. L. Hamblin Constructions Pty. Ltd. If the new equipment purchased by Transfield (Qld) Pty. Ltd. had, as was originally intended, been purchased by the taxpayer company, A. L. Hamblin Constructions Pty. Ltd., then this would be the simple case of a trade-in against the purchase of articles of a capital nature. But by the time of the acquisition of the unencumbered title from Mercantile Credits Ltd. the purpose of trading in the scraper had been abandoned and the purpose had been formed of acquiring the title so that Hastings Deering (Qld) Ltd. would purchase it at a higher price from the taxpayer company. It is true that a condition of the purchase was that Transfield (Qld) Pty. Ltd. would at the instigation of the taxpayer company purchase the great quantity of new equipment. But there was no saving on that capital purchase. Transfield (Qld) Pty. Ltd. was charged the full price. Nor was there a resale by Transfield (Qld) Pty. Ltd. to the taxpayer company so that the receipts on the scraper could be regarded in a real and business sense as a set off against the cost of the purchase by the taxpayer company of capital equipment with a consequent purpose of obtaining the benefit and effect of a trade-in. Transfield (Qld) Pty. Ltd. leased the new equipment to the taxpayer company and one is left with the position that the item was acquired for the purpose of profit-making by selling it at the higher price which was available. If, on the other hand, it be said that the business purpose of the taxpayer company was to reduce the effective cost to it of leasing the new equipment from Transfield (Qld) Pty. Ltd., then it appears to me that a scheme designed to secure such a saving on an outgoing of a revenue nature is a profit-making scheme and the resulting profit falls within s. 26(a). Next, the Caterpillar 922 Loader. What I have just said in respect of the Le Tourneau Scraper would equally apply if it were not that the loader had been purchased on hire-purchase at a time well before there was any purpose or scheme of disposing of it in reduction of the effective cost of leasing the new equipment from Transfield (Qld) Pty. Ltd. The equity in the machine was already in the taxpayer company and clearly it would in any event have taken up its entitlement to the property irrespective of any purpose of reselling at a higher price. The higher price obtained cannot be related to any scheme or purpose of saving in the effective cost of leasing the new equipment. I do not think that the sale to Hastings Deering Queensland Pty. Ltd. was part of any purpose of profit making related to the acquisition nor do I think that it constituted a carrying on or carrying out of any profit-making undertaking or scheme. It was simply that on a sale of an article of capital equipment the taxpayer company was, fortunately for it, able to exert commercial pressure on the purchaser to pay a higher price than it would otherwise have been prepared to pay. Nor does the higher price or any part of it fall within the language of s. 26(a). Lastly, the $5,000. The taxpayer company received this sum because it was able to nominate or at least to influence the selection of Hastings Deering (Qld) Pty. Ltd. as the supplier of the machinery which it would take on lease when that machinery was purchased by Transfield (Qld) Pty. Ltd. It was not a dealer in machinery and it was not part of its business to arrange or negotiate contracts for the purchase of machinery by third parties. Its business was the use in construction work of machinery acquired by it on purchase or lease. Savings by it in the cost of purchasing machinery were savings on capital account. However, savings in the cost of leasing machinery cannot be so regarded. The receipt of $5,000 was directly related in a business sense to the leasing of the new machinery from Transfield (Qld) Pty. Ltd. Its receipt effectively reduced the cost of leasing that machinery by the amount of $5,000. In these circumstances it seems to me that it must be brought into revenue account. I would therefore allow the two appeals by A. L. Hamblin Equipment Pty. Ltd. I would allow the appeal of A. L. Hamblin Constructions Pty. Ltd. in respect of the Caterpillar 922 Loader but otherwise I would dismiss that appeal.