High Court of Australia Barwick C.J. McTiernan and Stephen JJ. Mullens Investments Pty Ltd v Commissioner of Taxation (Cth) [1976] HCA 47 ORDER Appeals allowed with costs. Order of the Supreme Court of New South Wales (Administrative Law Division) set aside and in lieu thereof order that the appeals to that Court be allowed with costs. Matters remitted to the Commissioner to reassess in accordance with the reasons for judgment of this Court. Cur. adv. vult. The following written judgments were delivered:— 1976, Sept. 9 Barwick C.J. Sections 77A(3) and (4) of the Income Tax Assessment Act, 1936 as amended ("the Act"), effective until 30th June 1969, are in the following terms: (3) Subject to this section, a petroleum exploration company may, for the purposes of the next succeeding sub-section and Division 10aa of this Part, before the expiration of one month after the end of a year of income of the company in which the company has received moneys paid on shares or within such further time as the Commissioner allows, lodge with the Commissioner a declaration in writing signed by the public officer of the company that the company has expended, or proposes to expend, such of those moneys as are specified in the declaration in carrying on prospecting or mining operations in Australia for the purpose of discovering or obtaining petroleum or on plant necessary for carrying on such operations. (4) The amount of any moneys paid on shares paid by a person in a year of income of that person to a company and included in moneys specified in a declaration lodged by the company under the last preceding sub-section shall, subject to this section, be an allowable deduction from the accessable income derived by that person in that year of income. For the purposes of these reasons, I have treated the appellants as a single person throughout though the situation was in fact otherwise. There are, in all, eleven appeals. But nothing turns on the identity of others associated with the appellant in the relevant transactions who are also appellants. I have chosen his case as symptomatic of those of other taxpayers associated with him: the result of their appeals will be the same as the result of his. The appellant taxpayer, in his return of income for the year ended 30th June 1969, claimed deductions for moneys paid on shares of a company which had made a declaration appropriate to the operation of s. 77A(4). The payments fell into two categories: first, a payment on the issue of shares; and, secondly, a payment accepted by the company and claimed to be in satisfaction of a call upon the shares. The Commissioner of Taxation disallowed the deductions. The taxpayer appealed to the Supreme Court (Sheppard J.) which dismissed the appeal. The Court held that the transactions on which the taxpayer founded the claim to the deductions in the first category were either "shams" or were avoided by the operation of s. 260 of the Act. In relation to the second category, it held that, although the amount requested by the company had been paid by the taxpayer, no valid call had been made. On that footing the claimed deduction was disallowed. Stripped of presently irrelevant complexities, the facts found by the Supreme Court in relation to the first category were as follows. A company, Vam Ltd. ("Vam"), proposed to become part of a venture prospecting for natural gas in certain recognized natural gas fields in South Australia and in south-western Queensland. In order that persons investing in the project might obtain the benefit of the provisions of s. 77A(4), thus affording an inducement to such investment, a new company was formed, Vamgas N.L. ("Vamgas"), which would be solely engaged in prospecting for natural gas. The authorized capital of Vamgas was $10,000,000 divided into 20,000,000 shares of 50 cents each. Vam took up for cash 5,000,000 of such shares paid to 10 cents. A prospectus issued by Vamgas offered a further 5,000,000 shares, of which 3,000,000 were reserved for the shareholders of Vam and 2,000,000 were reserved for clients of the underwriting brokers and of four other named sharebrokers of whom the appellant taxpayer, himself a sharebroker, was not one. Vamgas made the declaration as required by s. 77A(4). The rights given to the shareholders of Vam and the clients of the underwriting brokers and of the sharebrokers to take up shares in Vamgas were styled "non renounceable", meaning that they could not be transferred but must be taken up by the shareholders or clients themselves. One of such shareholders, to whom I shall refer as "Close", did not wish to take up his entitlement immediately or perhaps at all. Having no need to do so, he did not want to avail himself of the financial benefits which could come from s. 77A(4). The taxpayer, a stockbroker, being aware of the issue of the Vamgas shares and of the attitude of Close in relation thereto, desired to obtain for himself the benefit of s. 77A(4). Accordingly, it was agreed between Close and the taxpayer that the taxpayer should pay Vamgas the amount payable on the issue of some of the shares which under the prospectus Close was entitled to take up. On the payment being made such shares, though issued or to be issued in the name of Close, were to belong beneficially to the taxpayer, his rights in that respect being protected by a declaration of trust by Close. Close was the shareholder on the register of members of Vamgas at all material times. The taxpayer was not on that register at any time. As Close did not wish to part irretrievably with the opportunity to possess such shares beneficially, the taxpayer, as part of the arrangement, gave to Close an option to purchase the shares at par of issue at any time after 28th February 1969, and before 15th May 1969. The taxpayer sought to obtain an agreement from Close that, at the request of the taxpayer, Close would purchase the shares at that price during that time. This, referred to in the evidence before the Supreme Court as a "two-way option", was specifically refused by Close who did not want to be obliged to purchase the shares: he was content with an option to do so. The taxpayer paid Vam the appropriate amount for the 23,500 shares in that company, the subject of this arrangement: this was the sum claimed as a deduction in the first category. Close, in whose name the shares were issued, made a declaration of trust of them in favour of the taxpayer, such declaration containing the agreed option to purchase the shares after February and before May. It was expected, certainly by the appellant and probably by other concerned parties, that the market price of the Vamgas shares would rise, perhaps substantially, before 28th February 1969, though of this there was at the time of the arrangement no certainty: in fact, the shares did appreciate in the market considerably. The parties contemplated that, in that event, the option to purchase would be exercised. Close did exercise the option to purchase the taxpayer's beneficial interest and paid the taxpayer the agreed price, i.e. the issue price, thus terminating the trust of the shares. In the result, the appellant did not derive any benefit from the increase in the market price of the shares. The Supreme Court found that the only purpose which the taxpayer had in entering into this transaction was "to alter the incidence of the income tax which he would pay and to relieve him from liability to pay income tax". It was indeed evident that the taxpayer entered into the transaction to obtain the advantages under s. 77A which payment to Vamgas of money on the shares was thought to give. If the transaction, being effective and not in breach of the Act, reduced the amount of tax which the taxpayer otherwise would pay, it did not alter in any relevant sense the incidence of tax. An intention to enter such a transaction so as to obtain the statutory benefit would not relevantly be an intention to alter the incidence of tax. The Court has made it quite plain in several decisions that a taxpayer is entitled to create a situation to which the Act attaches taxation advantages for the taxpayer. Equally, the taxpayer may cast a transaction into which he intends to enter in a form which is financially advantageous to him under the Act. W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation [1] and Federal Commissioner of Taxation v. Casuarina Pty. Ltd. [2] amply demonstrate this and are, in my opinion, very relevant to the resolution of this case. Also the general principle established by Inland Revenue Commissioners v. Duke of Westminster [3] , must always be kept in mind. The Privy Council in Inland Revenue Commissioner v. Europa Oil (N.Z.) Ltd. [No. 1] [4] said " in a matter of taxation it is necessary to consider and respect the legal form in which the concession", i.e. the transaction "was embodied. Their Lordships have no need to restate the principle laid down in such cases as Inland Revenue Commissioners v. Duke of Westminster" [3] . 1. (1957) 100 C.L.R. 66. 2. (1971) 127 C.L.R. 62. 3. [1936] A.C. 1. 4. [1971] A.C. 760, at p. 771. 5. [1936] A.C. 1. But, of course, if the actual transaction into which the parties have entered involves the taxpayer in liability to tax or does not afford the taxpayer some benefit in taxation, such as a deduction, and that transaction is cast into another form which, if effective, would relieve the taxpayer of tax, wholly or partially, the intention with which that form of transaction is chosen can properly be said to be an intention "to alter the incidence of the income tax", as that expression is used in this area of the law of income tax. The importance of the distinction will become evident as these reasons progress. Consequently, the expression of his Honour's finding as to the appellant's intention pre-empted the conclusion as to the nature of the actual transaction between the parties. It was, in my opinion, only acceptable as a description of the taxpayer's intention if the form of the transaction did not represent the actual transaction into which the parties had antecedently entered. It is of advantage, and indeed critical, at this point to examine the structure and operation of s. 77A(4) and the policy it expresses. In terms it is the payment of money to a petroleum exploration company, which has made the appropriate declaration, on shares in that company which attracts the right under the section to deduction of that amount of money from assessable income. The section does not require the payment to be made by the registered holder of the shares, as the Supreme Court correctly held. But in so far as the payment must be made "on" the shares, the payer must obviously have or intend an interest in them. Clearly, a payment made by the beneficial owner of the shares will qualify under the section. Further, the section does not require the shares on which the payment is made to be held by anybody for any length of time. There is, in my opinion, no warrant in the section for the view expressed by the Supreme Court that the section required the taxpayer in paying an amount on the shares to "have been making a real investment in such a venture" (i.e. prospecting or mining operations), if by that expression it was meant that the taxpayer must have an intention to retain the shares as themselves an investment either for capital gain or for income by way of dividend. It is sufficient, in my opinion, to satisfy the section that the money has been paid on the shares in the petroleum exploration company. There is no doubt in my mind that if one of the shareholders of Vam had taken up the whole or some part of his entitlement in Vamgas, paying an amount on the shares, his sale of them or of some of them forthwith would not disentitle him to the deduction. The purpose in taking up the shares solely to obtain the benefit of s. 77A(4) would not destroy his right to a deduction of the amount paid on the shares. Notwithstanding his disposal of the shares, the policy behind the section would have been achieved. That policy was the encouragement of capital contribution to petroleum exploration companies which earmark that capital for petroleum prospecting and thus advance petroleum exploration. Once the money is paid on the shares, the company having made the requisite declaration, that policy is satisfied. Because the policy is to work within the structure of a company with capital expressed in shares, the result of the provision of the capital by payment on such shares must mean that in exchange for the capital at least an interest in the shares of the company is created. But the section does not attempt to specify or regulate what may or may not be done with that interest in the share capital of the company. Perhaps it might be thought that it would have been reasonable to have done so, and to have required the shares to have been held for some period. But the draftsman took no step in that direction. The purpose of the section would have been satisfied in the instance I have suggested by the addition to the capital of the petroleum exploration company of the money paid on the shares, thus furthering the desired extension of mineral prospecting and exploration. The identity of the owners of the shares or of the beneficial rights therein was no concern of the policy of the section. Again, if one of the shareholders or a client of the underwriting brokers or of one of the named stockbrokers, having taken up his entitlement and paid money on the shares, had immediately given a stranger an option to purchase, his right to a deduction would be unaffected. The situation could be no different, in my opinion, if that option were granted before the shares were in fact taken up and paid for. Equally it could not matter, in my opinion, if, instead of selling the shares after they had been taken up, the shareholder in Vam, or the client of the underwriting brokers or of one of the stockbrokers, had agreed before taking them up to sell them as soon as he had paid for them. His right to a deduction for what he paid on them would, in my opinion, be given by the section and would be unaffected either by his purpose in paying money on the shares or by his dealing with them. The terms of the prospectus in this case precluded a sale of the right to take up the shares. Consequently, the transaction between the parties was a disposal of the beneficial interest in the shares, the shareholder in Vam exercising his right to the issue of the shares. It is against the background of this understanding of the meaning and operation of the section that the conclusions of the Supreme Court on the facts as found in relation to both categories of payment must be examined. I should first observe in relation to the first category that there was, in my opinion, no evidence before the Supreme Court upon which it could be concluded that there was some transaction agreed upon by the parties for which the transaction have described was substituted in order to gain some advantage in taxation which the former transaction would not have given. The transaction I have described was the only transaction between the parties of which there was any evidence. The Supreme Court seems to have thought that Close had agreed to borrow from the taxpayer the money paid by the taxpayer to Vamgas and that the declaration of trust was in truth made by way of security for a loan which did not carry any interest or advantage to the lender other than the possible benefit under s. 77A(4). But I can see no basis for such a conclusion. Close said he did not want to take up the shares or to seek any advanatge in taxation from the payment therefor. He was unwilling to bind himself to buy the beneficial interest in the shares, even between February and May, let alone to take them up at the date of their issue. So far as I can see, the Supreme Court did not disbelieve this evidence: but, even if it did so, that circumstance would not have provided any positive evidence of some transaction antecedent to or different from the described transaction. It is, in my opinion, nothing to the point that the effect of the transaction actually entered into by the parties might be the same as that which a loan by the taxpayer to Close with security over the shares would have produced. There is no room in this connexion for any doctrine of economic equivalence. In Europa Oil (N.Z.) Ltd. v. Inland Revenue Commissioner [No. 2] [5] , the views expressed in Inland Revenue Commissioner v. Europa Oil (N.Z.) Ltd. [No. 1] [6] were affirmed: "Taxation by end result, or economic equivalence is not what the section (a taxing provision) achieves." 1. [1976] 1 W.L.R. 464, at p. 472; [1976] 1 All E.R. 503, at p. 509. 2. [1971] A.C., at p. 772. In my opinion, having regard to those matters, there was no basis on which the transaction into which Close and the taxpayer entered could be held in any sense to be a sham. It represented a genuine commercial operation with commercial consequences. Close had no need of the tax advantage which payment by him upon the shares would give. He did not want to take up his entitlement or to bind himself to acquire the shares beneficially. The taxpayer sought to gain the advantage for himself. He acquired a beneficial interest in the shares and was prepared to take the risk of continuing ownership. Whilst it may have been contemplated that Close would exercise the option of purchase, there was neither obligation nor certainty that he would do so. If the market had not risen to a level which made the exercise of the option financially attractive, the taxpayer would have been left with the shares: and there may have been other contingencies which precluded the exercise of the option. The risk of the market, whatever might have been the sanguine expectation of brokers, was indeed accepted by the taxpayer. I turn now to consider whether the transaction was avoided by s. 260. This question must be approached on the footing that if not struck down the transaction between the parties would be effective to entitle the taxpayer to the deduction claimed. Though the section speaks of the purpose in entering into the transaction, it can have no relevance if, being effective, the transaction does not alter the incidence of tax, as that expression has come to be understood. As I have already pointed out, there will be no relevant alteration of the incidence of tax if the transaction, being the actual transaction between the parties, conforms to and satisfies a provision of the Act even if it has taken the form in which it was entered into by the parties in order to obtain the benefit of that provision of the Act. It would be otherwise if there had been some antecedent transaction between the parties, for which the transaction under attack was substituted in order to obtain the benefit of the particular provision of the Act. Section 260 is not directed to tax on income to which the taxpayer is entitled only by reason of the actual transaction into which the parties have entered. It is said in Europa Oil (N.Z.) Ltd. v. Inland Revenue Commissioner [No. 2] [7] of the New Zealand equivalent of s. 260: "The section does not strike at new sources of income or restrict the right of the taxpayer to arrange his affairs in relation to income from a new source in such a way as to attract the least possible liability to tax." The present appeal is concerned not with new sources of income but with a new basis for deduction. If the only relevant transaction is that under attack, it seems to me that by parity of reasoning, s. 260 may be said not to be concerned with the right to a deduction which the only relevant transaction between the parties would produce in the future. 1. [1976] 1 W.L.R., at p. 475; [1976] 1 All E.R., at p. 512. Again, it is otherwise if, by reason of an antecedent transaction or situation, the taxpayer was already subject to tax in respect of an income which that antecedent transaction or situation produced or would produce, or was not or would not be entitled to any deduction in the situation created by that ante cedent transaction. In such a situation the avoidance of the impugned transaction, because it represented an endeavour to cast what had already been agreed into a form which avoided or lessened the amount of tax otherwise payable, would expose the antecedent situation which did not carry any right to a deduction. Just as there must be income, not derived from the impugned transaction but derived from the antecedent transaction between the parties which, when that transaction is struck down, is exposed as producing assessable income, so, in my opinion, in relation to a deduction, the avoidance of the impugned transaction must disclose a transaction or situation which did not entitle the taxpayer to a deduction. A good illustration of such a situation is to be found in the case of Jaques v. Federal Commissioner of Taxation [8] —a case much pressed upon us by counsel for the Commissioner but, in my opinion, a case which lends no support to the Commissioner's argument. The facts of Jaques v. Federal Commissioner of Taxation were that three companies had reached a concluded agreement for the reconstruction of one of them which was to be placed in liquidation. This agreement involved the transfer of assets from the company in liquidation to each of the other companies in exchange for paid up shares in each of the others appropriate in total number to the total value of the transferred assets. That total number of shares was to be provided as between the two other companies according to the value of the assets respectively transferred to each of them. The fully paid shares were intended thereafter to be distributed in specie by the liquidator to the shareholders of the company in liquidation. 1. (1924) 34 C.L.R. 328. The taxpayer was a shareholder in the company to be placed in liquidation. Had the arrangement between the three companies been carried out, the taxpayer would have received from the liquidator his aliquot number of shares in each of the other companies. Being shares issued as fully paid up, no question of a deduction for moneys paid for calls could arise. But after the three companies had entered into and duly documented the transaction I have described, it was realized that by carrying out the reconstruction by a different method, tax advantages for the shareholders of the company in liquidation and a saving in stamp duty could be obtained. The earlier documents and the resolution supporting the documents were thereupon revoked in order that the new arrangements for the reconstruction could be entered into and carried out. Under the new arrangement, the assets of the company in liquidation were to be transferred by the other two companies in two categories, movables to be transferred under an oral contract and the immovables under a written contract. The assets transferred to one of the new companies were to be paid for by the issue of fully paid up shares in that company. The assets transferred to the other company, which qualified as a mining company for the purposes of s. 18(1) (i) of the Income Tax Assessment Act 1915-1918 ("the 1915 Act"), were to be paid for partly by the issue of contributory shares paid to two shillings and partly by cheque for the balance of the value of those assets. Section 18(1) (i) gave a deduction for calls paid on shares in a mining company. In carrying through this new agreement between the liquidator and the two new companies, authorities were obtained by the liquidator from the shareholders of the company in liquidation to apply in the name of these shareholders for the appropriate number of shares in the new companies and to apply the money paid by the mining company as part of the price of the transferred assets in satisfaction of calls which that company then made on the contributory shares. These authorities were exercised, the shares applied for, the calls made and cheques exchanged to effect, on the one hand, payment of the price and, on the other, payment of the calls. Thus, the taxpayer obtained by the distribution of the liquidator his proportion of the fully paid up shares issued by the one company and, as a result of his application therefor made through the liquidator, his proportion of the contributory shares in the mining company. He paid, again through the liquidator, the sum of eighteen shillings per share by way of calls made by the mining company. It was his claim to a deduction of the amount of eighteen shillings per share on the mining company's shares which was contested in the case heard at first instance by Rich J. and thereafter on appeal by a full court. Each hearing resulted in a denial of the right of the taxpayer to the deduction. Various reasons were given by the participating Justices: but in all the reasons the existence of the first transaction, and the fact that the second was but a form of carrying out the agreed reconstruction, are essential to the conclusion that the new arrangements were ineffective because of s. 53 of the 1915 Act to obtain for the shareholders the benefit of the deduction for calls for which s. 18(1) (i) of the 1915 Act provided. Knox C.J. said [9] : "In my opinion the appellant has failed to establish that either the alleged sale for cash to the new companies or the alleged payments by and to those companies were genuine bona fide transactions intended to create real rights and obligations. I think the proper conclusion to be drawn from the facts to which I have referred is that the transactions which began with the resolution of 25th August 1920 and ended with the belated resolution of 27th January 1921 were in no sense real genuine transactions, but were devised and carried out in order to conceal the true nature of the real agreements between the parties, namely, the agreement of 23rd June 1920" (the first agreement) "which provided for the issue to the members of the old company without any payment being made by them to the new companies of fully paid shares in those companies, and to enable the members of the old company to escape wholly or in part from their liability to pay income tax on their true taxable income by obtaining a deduction under s. 18(1) (i) of the Income Tax Assessment Act to which they were not on the real facts entitled. These transactions, on which the appellant's claim to a deduction is rested, constitute in my opinion an arrangement having the purpose of relieving the appellant, in common with other members of the old company, from liability to pay income tax which on the true facts he was liable to pay, and so fall within s. 53 of the Income Tax Assessment Act 1915-1918. If the agreement of 23rd June 1920 had been carried into effect in the ordinary course, the appellant would have had fully paid-up shares in the new companies, and would not have been entitled to any deduction under s. 18(1) (i) of the Act. That agreement has in truth been carried into effect, and s. 53 of the Act prevents the appellant from availing himself of the devious methods employed for the purpose of enabling him, in common with other members of the old company, to claim a deduction in respect of calls alleged to have been paid by him to the new companies." 1. (1924) 34 C.L.R., at p. 355. Isaacs J. [10] called attention to the binding nature of the original arrangements between the companies and contrasted the case of a purchase of shares with the accompanying object of satisfying the requirements of the law as to payment of calls with the case before the Court which he described as in no sense a business operation, and one which did not alter the income of the taxpayer or change its ownership carried out by the misuse of legal expedients and with the express and sole purpose of lessening the statutory liability of the taxpayer. This clearly was the liability which would fall upon the shareholders in the carrying out of the original arrangements. 1. (1924) 34 C.L.R., at pp. 359-360. Starke J., treating the new arrangements as genuine transactions, said [11] : There is nothing wrong in companies and shareholders entering, if they can, into transactions for the purpose of avoiding, or relieving them of, taxation (Simms v. Registrar of Probates [12] ; Deputy Federal Commissioner of Taxation v. Purcell [13] ; and it depends wholly upon the construction of the taxing Act whether they have succeeded. The form the transaction took, in this case, was admittedly devised for the purpose of securing a deduction of calls. But the transactions did not, in any business sense, alter the position of the shareholders: their income was not diminished, nor their property increased. As my brother Rich rightly said, under the first scheme the appellant "as a shareholder in the old company would have been entitled to his proportionate share of the money payable by the new companies to the old company as consideration for the assets transferred. That proportionate share would have amounted to £5,625. Had he so received it, he would have been liable in the ordinary way to pay income tax, not on that sum, but on his general income"; whilst under the second scheme the appellant applied for shares in the new companies and agreed to pay over to the new companies for calls which it was arranged should be made, his share in the old company's assets, namely, £5,625. Such an arrangement is, in my opinion, struck by the provisions of s. 53, and is avoided to the extent mentioned in that section. 1. (1924) 34 C.L.R., at p. 362. 2. [1900] A.C. 323, at p. 333. 3. (1921) 29 C.L.R. 464, at p. 472. It would follow, in my opinion, from the reasoning of all these Justices, that had there been no antecedent agreement and the companies had from the outset agreed in terms of the new or substituted agreement, the shareholders would have been entitled to a deduction of the amount paid as calls on the mining shares. The choice of the second form of reconstruction, if originally taken, though chosen so as to obtain the benefit of the statutory deduction, could not have been struck down by s. 53 of the 1915 Act, the forerunner of s. 260. Here, as I have already pointed out, there was no earlier transaction which, if carried out, would not have given the taxpayer a deduction. There was only the one transaction which I have described under which the taxpayer obtained the beneficial interest in the shares and accepted the risk, albeit it might prove a small or negligible risk, of the shares remaining in his hands, perhaps on a falling market. Another approach reaching the same result is to apply directly the principle of W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation [14] , affirmed in Federal Commissioner of Taxation v. Casuarina Pty. Ltd. [15] . On that view, the taxpayer in the only transaction into which he entered did no more than bring himself within the provisions of s. 77A(4), a situation to which s. 260 cannot apply. The transaction between the parties was not significantly different from the supposed transactions to which I earlier referred. Close sold the beneficial interest in the shares to the taxpayer with an option to re-purchase, the taxpayer applying the price in satisfaction of Close's obligation to pay for the shares upon his exercise of his rights under the prospectus. I am therefore of opinion that the finding of the Supreme Court that the transaction between Close and the taxpayer in relation to the shares in Vamgas was either a sham or avoided by s. 260 cannot be supported. 1. (1957) 100 C.L.R. 66. 2. (1971) 127 C.L.R. 62. There is no need for me to recite the detailed facts relating to the second category of the payments for which a deduction is claimed. It suffices to say that, according to the findings of the Supreme Court, the taxpayer in response to a notice of the making of a call upon the shares to which he was beneficially entitled, a notice which was given to him and oddly enough not to Close, paid to the company the amount said to be a call. The company received that amount as an amount paid on the shares —indeed, the company received the money as and for a call upon the shares. But, for reasons which he gives, Sheppard J. held that a call had not been duly made under the articles of association of the company because of the lack of a resolution of the board of directors making the call. But, again, it is essential to observe the elements which the section prescribes as the entitlement to the deduction. It is the payment of money on the shares of a prospecting company which has made the requisite declaration that gives the right to a deduction. There could be no doubt in this instance that the taxpayer paid the amount as and for a call upon the shares and that the company received the money in the same sense. I find great difficulty in the conclusion that none the less the taxpayer did not pay the amount on the shares within the meaning and operation of the section. In my opinion, the irregularities in the making of the call, even if they were such as to have made the call unenforceable or ineffective, are not effective to deny the proposition in the circumstances of the case that the taxpayer paid and the company received on the shares the amount of the "call". Again, the policy which the section was, in my opinion, designed to express was fulfilled by the accretion to the capital of the prospecting company represented by the taxpayer's payment on the shares. For these reasons, I would allow the appeal to this Court and the appeal to the Supreme Court. The taxpayer, in my opinion, was in each instance entitled to the deductions claimed. McTiernan J. These are appeals from a decision of Sheppard J. in the Supreme Court of New South Wales. The appellants, in an attempt to avail themselves of deductions provided under s. 77A of the Income Tax Assessment Act, 1936-1967 Cth, had entered into two transactions whereby they paid money on shares in a company engaged in the exploration for petroleum. As I read his judgment, the judge found that both transactions either were shams, or were void as against the Commissioner under s. 260 of the Act. He also held that moneys paid in the course of the second transaction pursuant to a purported call were not "moneys paid on shares" within the meaning of s. 77A; firstly because the appellants had never lodged share transfers with the company and so were not liable under the Articles to pay the call; secondly because he found that no resolution authorizing the call had ever been passed. Before I discuss the facts I should note that the hearing before Sheppard J. was the first occasion on which the matter came to trial. It was an appeal, but only in the sense imported by s. 187 of the Act, which provides that a taxpayer who is dissatisfied with the Commissioner's refusal to allow an objection to an assessment may request the Commissioner either:—"(a) to refer the decision to a Board of Review for review; or (b) to treat his objection as an appeal and to forward it either to the High Court or to the Supreme Court of a State". A subsequent amendment to the section has removed the right of direct appeal to this court, but that is immaterial. The transactions with which we are concerned took place in the financial year which ended on 30th June 1969. The appellants duly filed their annual returns claiming the money paid on the shares as deductions. However the Commissioner issued assessments excluding those deductions and thereby subjecting to taxation income which the appellants had hoped the deductions would offset. The appellants made an objection which the Commissioner disallowed, and they thereupon elected to request under s. 187 that the matter be treated as an appeal. Hence the appeal decided by Sheppard J. was against a decision of the Commissioner, and under the procedure laid down in Pt V, Div. 2 of the Act it took the form of a trial on the objection taken afresh, though confined to the grounds stated in the objection. Section 199(1) enacts that, in such an appeal, the court may make such order as it thinks fit, and s. 199(2) provides that such order shall be final and conclusive. The appeal now before this Court is of a different kind. It comes in the court's appellate jurisdiction, as s. 200 expressly provides, and accordingly the court must keep within its appellate powers. Sheppard J. heard oral testimony and could observe the protagonists. He made specific findings as to the credibility of some witnesses. Today higher courts have the advantage of reliable transcripts of the evidence given below, but although the problem rarely arises in a taxation matter, in such an appeal, as in any other, the court will be reluctant to interfere where a judge's observation of a witness influences his findings of fact. In this respect I need do no more than refer to the judgment of Lord Wright in Powell v. Streatham Manor Nursing Home [16] . 1. [1935] A.C. 243, at p. 263. Although there are a number of appellants, their counsel concedes that their appeals must stand or fall together. There is a similar profusion of testimony, but for the purposes of the appeals a summary of the facts will suffice. The individual appellants were all associated with the stock-broking firm of Mullens and Co., being either partners, or their family companies. The other group involved, amongst whom a Mr. Close was most prominent, consisted of shareholders in Vam Ltd., the promoter of Vamgas N.L. Vamgas was incorporated in August 1968, and the Vam shareholders received what were described as "non-renounceable" rights in its first issue of shares. The term simply meant not-transferable. The origins of the disputed transactions lay in the following facts. Vamgas' sole activity was to prospect for natural gas; accordingly deductions were available under s. 77A to those legal or beneficial owners of shares who paid money on its shares. The Vam shareholders wished to retain an interest in Vamgas' proposed exploration, but lacked the funds to take up the shares. Nor had they need of the deductions. The Mullens group on the other hand had no interest in the shares' prospects, but they did have large incomes for the year in question, and wished to obtain deductions to reduce their liability to taxation. The result was a meeting of minds. In the first transaction the Mullens group paid the exploration company the amount due on the shares. The Close group chose not to surrender their rights; instead, because the rights were non-transferable, they took them up, but they then executed declarations of trust in favour of the Mullens group. Their long-term interest in Vamgas was protected by the grant to them by the Mullens group of options to purchase the shares at par. While the Mullens interests were still the beneficial owners of the shares the exploration company made a one for one share issue; the Close group, though only trustees, regarded themselves as entitled to deal in these rights, and did so. Being thus in funds they were able to exercise the options. The Mullens group thereby received their money back, yet retained the benefit of substantial taxation deductions. The parties to the second transaction were the Mullens group, who felt a need for further deductions, and Vam Ltd. itself. Vam held partly paid shares in Vamgas on which it was expected a call would shortly be declared, as part of a program of drilling which Vam was committed to finance. Vam was in financial difficulty and did not wish to provide the necessary funds; nor did it require the deductions as it already had the advantage of deductions from other mining activities. The arrangement made was that Vam would transfer 1,250,000 Vamgas shares at their paid up value to a nominee company of the Mullens group, who would pay the call on each share; and that when (as was expected) they wished to dispose of the shares, they would first offer them to Vam at market price. And so it transpired, except that Vam bought back the shares at par, when market price was slightly more. The outcome was that the Mullens group had regained the bulk of their outlay, and once again in their return they claimed the moneys paid to Vamgas as a deduction under s. 77A. The Commissioner raised the question of the validity of the call as one reason for disallowing the claimed deduction. The obligation on Vam's part to pay the call was a matter which had been raised before the transaction was entered into, but the resolution declaring the call was not to be made until Vam had transferred the shares. When the case came to court no record of such a resolution could be found. Vamgas' Articles of Association provided for decision by "flying resolution" being a resolution in writing, signed by the directors, or a message to the company secretary from a director assenting to such a resolution. Those concerned gave evidence that they felt sure such a resolution must have been passed; but they could not point to it, nor could they remember it. A second obstacle to the appellants was that art. 24 of the articles of association of Vamgas N.L. imposed liability to pay calls upon members only. The Mullens group never became registered, nor did they lodge with Vamgas N.L. the share transfers they took from Vam. When the shares were sold back to Vam the sale was "married" to the earlier one in a procedure familiar to brokers whereby only the first and the last holders of scrip involved in a chain of transactions become registered, and the intermediate holders have their purchase "cancelled" by the subsequent sale. The view I take makes it unnecessary for me to consider these two submissions. The evidence before the Supreme Court on which the learned judge decided that the objection to each assessment in question, based upon s. 77A, was properly disallowed by the Commissioner is fully stated in his judgment. I would concede, s. 260 apart, that the amounts claimed by the appellants to be allowable under s. 77A formally satisfied the conditions of that section, notwithstanding the complexity of the arrangements made to qualify each payment as a deduction allowable under s. 77A. The notice of objection lodged against each assessment states that the amounts of capital paid to Vamgas in respect of which a deduction was claimed in the taxation return, the basis of the assessment, was paid "for the purpose of obtaining the benefit of the allowable deduction provided by s. 77A of the Act". That no doubt was the purpose for which the amounts of capital in question were paid. But the material question here under s. 260 is, did the arrangement under which the beneficial ownership of the shares was acquired or that under which liability to pay calls on shares was produced, wholly or in part have a purpose specified in (a), (b), (c) or (d) of s. 260. An amount of moneys which is an allowable deduction under s. 77A is declared by this section to be "an allowable deduction from the assessable income ". In my opinion the only practical purpose of the arrangements respectively was to relieve the persons and companies, appellants in these proceedings, from liability to pay any tax other than on an amount of assessable income from which the deductions claimed are subtracted. For these reasons, I would dismiss the appeals. Stephen J. These appeals are concerned with the application of s. 260 of the Income Tax Assessment Act and with whether the transactions in question are "sham" transactions. A point of statutory interpretation, concerning s. 77A of the Act, also arises. For the purposes of these appeals a summary of the facts will suffice. Two separate transactions are involved. Each concerns the same two distinct groups, the first consisting of certain shareholders in Vam Ltd., the "Vam shareholders", the second of members of the share-broking firm of Mullens and Co., their families and certain investment companies associated with those members, the "Mullens group". Vam Ltd., a listed public company engaged in mining activities, was the promoter of Vamgas N.L., a company incorporated in August 1968. Vamgas had been promoted so that it might prospect for natural gas and this was to be its sole activity; as a petroleum exploration company those who paid money on its shares might become entitled to the deductions allowable under s. 77A of the Act. Of its first issue of shares a large number were reserved for the shareholders of its promoter, Vam Ltd., who became entitled to non-renounceable rights in that issue. Some shareholders in Vam Ltd. were unable to take up and pay for these shares out of their own funds; nor could they benefit from the very substantial tax deductions available to those subscribing money on the issue of those shares, they lacked the very large taxable incomes against which such deductions might be set off. They were, however, anxious to participate as shareholders in Vamgas' proposed prospecting ventures. The position of the Mullens group was quite different. They were well able to take full advantage of any available tax deductions in the then current year of taxation but were not interested in participating in Vamgas' prospecting activities. An arrangement was arrived at between these two groups by which each might attain its desired objective. The Mullens group paid to Vamgas the amount due on the allotment of its shares to the Vam shareholders who in return executed declarations of trust in favour of the members of the Mullens group. The latter granted in favour of the Vam shareholders options to purchase at par their beneficial interest in the shares. These options were duly exercised, the Vam shareholders thus acquiring the beneficial interest in the shares in Vamgas issued to them. The Mullens group, the present taxpayers, claimed deductions in respect of the moneys paid by them to Vamgas but the Commissioner disallowed their claims. The second transaction occurred slightly later in time. Vam Ltd. was itself the holder of partly paid shares in Vamgas on which calls were shortly to become due and which Vam did not wish to pay out of its own funds. The Mullens group, still anxious to gain further deductions under s. 77A, bought from Vam Ltd., at their then paid up value, some 1,250,000 Vamgas shares, subsequently paid the call moneys and, as they contend, thereby became entitled to s. 77A deductions. It had been understood throughout that the Mullens group were likely to wish to dispose of the shares they had thus acquired in Vamgas once they had paid the call moneys and it had been agreed with Vam Ltd. that it should have the first refusal of those shares. Soon after payment of the call the shares were offered to Vam Ltd. at their par value, they then being quoted on change at slightly above par, and that offer was accepted, the Mullens group paying the stamp duty on the sale. The shares thus reverted to Vam Ltd. and the Mullens group claimed to deduct these moneys paid to Vamgas. Once again the Commissioner disallowed the claimed deductions. The transactions originated in a lack of funds with which to pay for Vamgas shares; due to the intervention of money supplied by the Mullens group the need for the funds was postponed for a time, but only postponed; the funds would still have to be found, and paid to the Mullens group, if Vam Ltd. and its shareholders were to regain their interest in Vamgas' exploration activities. Fortunately for Vam shareholders, Vamgas determined to make a one for one share issue soon after the two transactions were initially entered into; the sale by Vam shareholders of rights to the new issue, which they treated themselves as entitled to deal in, provided most of the funds which they required with which to exercise the options granted by the Mullens group. The learned trial judge concluded that in the case of the first transaction s. 260 was applicable and resulted in avoiding, as against the Commissioner, those aspects of the transaction which would otherwise have entitled the taxpayers, the members of the Mullens group, to deductions from taxable income; alternatively he held the transaction to be a sham. In the case of the second transaction his Honour again found s. 260 to be applicable but in that instance expressed doubts as to whether an alternative finding of a sham was justified. Consistently with these conclusions his Honour dismissed all of the taxpayers' appeals. The first transaction, which his Honour regarded, in the alternative, as a sham, involved quite substantial documentation. It began with applications by the Vam shareholders for shares in Vamgas and declarations of trust and transfers in blank signed by the Vam shareholders in favour of the Mullens group; then came a cheque in payment of the Vamgas shares, provided by the Mullens group, option agreements and, lastly, the documentation by which the amounts payable to the Mullens group on the exercise by the Vam shareholders of the options were recorded and effected. To treat the transaction as a sham is to regard the Mullens group, when paying to Vamgas the amount due upon the allotment of shares, as not in truth the owners of those shares for the purposes of s. 77A of the Act, despite the apparent effect of the documentation. His Honour rejected the Commissioner's submission that, by subjecting their beneficial ownership of the Vamgas shares to an option conferring upon others a right to acquire those shares, the Mullens group were prevented from being owners for the purposes of s. 77A. It follows from the rejection of this submission that in his Honour's view the options granted by the Mullens group did not themselves result in there being a sham. His Honour in the course of his reasons referred to another submission made by the Commissioner, which described the real transaction as one in which the Mullens group financed the acquisition of the shares in return for the tax advantages they would derive from doing so. This, I think, was what his Honour regarded as the true nature of the first transaction and the false appearance lent to it by the documentation was what his Honour regarded as amounting to a sham; that appearance of beneficial ownership of the shares by the Mullens group which the documents conveyed, when in reality the group merely had ownership vested in them temporarily pending the exercise by the Vam shareholders of their options to purchase, was the sham. Three matters of evidence were relied upon by his Honour in coming to that conclusion. The first was a diary entry made by the manager of the Mullens group's bankers recording the substance of a discussion with Mr. Bridges, the representative of the Mullens group, when he approached the bank with a view to procuring short-term overdraft accommodation which would permit the group to pay to Vamgas the moneys due on the issue of Vamgas shares. That diary note described Mr. Bridges' account of the proposed transaction as one involving advances by the Mullens group to Vam shareholders. However, it went on to describe the Vam shareholders as taking up the shares to hold them "as beneficial holders for Mullens & Co. on the understanding that the shareholders will purchase the shares from Mullens & Co. at par when the shares are listed "; the "purpose of the exercise" from the standpoint of the Mullens group was recorded as being to make tax deductions available to them. The second matter of evidence consisted of a minute of a meeting of a company which was one of the Vam shareholders. It purported to record the arrangement made by that company with the Mullens group in relation to Vamgas shares. A Mr. Close, who throughout the first transaction acted on behalf of the Vam shareholders, described the discussions which he had with Mr. Bridges, acting on behalf of the Mullens group. When he was referred to this minute he described it as being in accord with the "spirit" of Bridges' offer to him which he accepted on behalf of the Vam shareholders. The minute spoke of the assignment by the particular Vam shareholder in question of its rights in Vamgas to the Mullens group so that that group might have the tax benefit, any profit from a sale by the Mullens group of Vamgas shares reverting to the Vam shareholder. These first two items of evidence reveal the obvious, that the Mullens group's only interest in the transaction was the tax benefits which it promised them, this in itself does not bear at all upon the question of a sham. The mention in the bank diary entry of the making of "advances" by the Mullens group to the Vam shareholders may be more significant but it is combined with the reference to "beneficial holders", a reference which his Honour correctly interpreted as meaning that the Vam shareholders were to hold the shares on trust for the Mullens group, in whom beneficial ownership would reside; moreover the entry goes on to speak of a "purchase" of the shares from the Mullens group. These two latter references are at odds with the concept of the transaction being in truth a mere loan. The entry must, I think, be regarded as confused and equivocal; which is perhaps not surprising, representing as it does the author's impression of what he learned in one interview about a relatively complex proposed transaction. The company minute is also curious; it expressly contemplates that the Mullens group may sell the shares, presumably to third parties, during the period before any exercise of the options and it provides for the destination of any profit, although not for the bearing of any loss, on such sale. The third matter of evidence consists of the way in which, in order to raise moneys due to the Mullens group on exercise of the options, certain Vam shareholders dealt with Vamgas shares and Vamgas rights at a time before they had, through Mr. Close, orally exercised the options granted to them by the Mullens group. In one instance a Vam shareholder, with the active concurrence of Mr. Bridges, who was not only spokesman for the Mullens group but also this shareholder's own broker, sold shares in Vamgas during the period between that group's subscription for Vamgas shares and the subsequent exercise of the options in respect of those shares. His Honour treated these sales by that shareholder of shares which, if there was no sham, she did not own, as evidence that in fact there was a sham; the shareholder acting as she did because in reality she was at all times the true owner of the shares. It is clear that the Vamgas shareholders at all times anticipated that they would in due course exercise their options and what this shareholder did may well have been only to indulge in instances of short selling, an activity involving, in the particular circumstances, very little risk because of the existence of her option rights and her broker's possession of the relevant scrip and signed transfers in blank. In other cases Vam shareholders, during the same period, sold rights to Vamgas shares to which they would only become entitled upon exercise of their options. Again this may be accounted for as short selling of rights in circumstances of relative absence of risk; it is not, at all events, conduct necessarily inconsistent with the existence of a genuine transaction of the character asserted on behalf of the taxpayers. There are, in my view, very real difficulties in adopting the theory that what here took place was but a sham. The documents evidencing the transaction are real enough and they were given effect to; the genuineness of the transaction is supported not only by the effect which the documents bear on their face but also by cogent evidence, supported by documentation, which bears upon the very question of the ownership of the shares by the Mullens group. Bridges in evidence spoke of his unsuccessful attempt to secure from Close what he described as two-way options, which would entitle the Mullens group to require the Vam shareholders to buy back the beneficial interest in the Vamgas shares at par. Close's evidence was to the same effect; called by the Commissioner, he was not specifically asked about two-way options but in answer to his Honour said that the Vam shareholders were under no obligation to exercise their options and buy the shares and that, indeed, he, as one of those shareholders, would not, but for the Vamgas rights issue, have been in a position to provide the necessary purchase price which would have been payable had there been any obligation imposed upon him to buy the beneficial interest in the shares. I do not read that part of his Honour's judgment in which he deals with Bridges' evidence as to two-way options as a rejection of that evidence, nor did his Honour reject this evidence of Close. The form of the option agreements is consistent with the oral evidence; so are the probabilities of the matter, namely that the Vam shareholders were unwilling to be bound from the outset to buy back, and pay for, the shares; their very lack of the cash sums required to do so was their only reason for entering into the transaction with the Mullens group. The refusal by the Vam shareholders to obligate themselves to purchase the beneficial interest in the shares I regard as inconsistent with the concept of the transaction as a mere loan; that refusal meant that the Mullens group could never require "repayment" of the suggested "loan" and must always face the possibility that they might be left with the Vamgas shares on their hands, their payment of allotment moneys to Vamgas not being recoverable from the Vam shareholders. The appropriate inference from the evidence was, I think, that the transaction was precisely what it purported to be, an acquisition by the Mullens group of the beneficial ownership in the shares which they had paid for and the grant by them of option rights to the Vam shareholders in whose names the shares stood. There was, of course, the strongest commercial probability that the Vam shareholders would exercise their options, but it remained but a probability. Such a transaction is precisely what the documents record and the existence of this probability goes no way towards establishing a sham. It follows that, in my view, the taxpayers were entitled to the deductions claimed by them under s. 77A unless s. 260 is effective to deprive them of this entitlement. It is clear that the Mullens group entered into this first transaction with no other purpose than to gain the advantage of tax deductions. In the particular circumstances of this case this fact, far from playing any part in attracting the provisions of s. 260, points in quite the contrary direction; it demonstrates that the Mullens group was never in the position of having some transaction in mind or already embarked to which they gave a different form so that they might clothe it with tax advantages. The only transaction they ever contemplated was precisely that into which they entered and no other. Section 260 is concerned with instances in which there exists a purpose or effect of altering the incidence of tax, of relieving from liability to pay tax, of defeating, evading or avoiding liability imposed by the Act or of in any respect preventing its operation. The transaction here in question does not supply any such instance unless indeed purposefully to take advantage of a deduction offered by the legislation is enough to attract the section. That it is not is now well established. The principle in W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation [17] is not to be confined to cases where the Act offers to the taxpayer a choice of alternative tax consequences either of which he is free to choose; it was there held that merely because the taxpayer chose, quite deliberately, the alternative most advantageous to it from a tax standpoint it did not thereby attract s. 260. So, too, if no question arises of a choice between two courses of conduct but, instead, the Act offers certain tax benefits to taxpayers who adopt a particular course of conduct; the adoption of that course does not establish any purpose or effect such as is described in s. 260. Instead, an assessment which reflects the tax consequences of the course of conduct which the taxpayer has in fact adopted will then represent a due and proper incidence of tax, there will be no relief from, or defeating of, liability to tax and the Act will have the very operation which the legislature intended. As the Chief Justice has said in Federal Commissioner of Taxation v. Casuarina Pty. Ltd. [18] , there is no room for the application of s. 260 where the taxpayer has become liable for the amount of tax "appropriate under the terms of the Assessment Act to the state of affairs obtaining" at the relevant date; "steps taken to bring about that state of affairs" do not operate to attract s. 260. 1. (1957) 100 C.L.R. 66. 2. (1971) 127 C.L.R. 62, at p. 81. The intent of the section has been described as being "to protect the general provisions of the Act from frustration, and not to deny to taxpayers any right of choice between alternatives which the Act itself lays open to them" (Keighery's Case [19] ). Their Honours went on to point out that in consequence it was necessary to see whether, in applying s. 260, what would be rendered ineffectual would be an attempt to defeat etc. a liability imposed by the Act or, rather, an attempt to give a company an advantage which the Act intended that it should be given. Likewise here: if s. 260 is to be applied its plain effect will be to render ineffectual the attempt to give the Mullens group advantages which the Act does, in my view, manifestly intend them to have. This intent emerges from the terms of s. 77A, which says quite unequivocally that a beneficial owner of shares who pays money to a company in the circumstances specified shall be allowed a deduction of the amount so paid. This section contains no qualification restricting its operation to those who happen to benefit from it by inadvertence; knowledge of its effect and an intention to take advantage of its provisions are no disqualification. Nor does it impose, as it well might, any condition such as a minimum period during which shares must be held by the taxpayer before or after payment is made on the shares, the operation of the section is conditioned only in ways which the Mullens group have fully satisfied. 1. (1957) 100 C.L.R., at p. 92. Section 260 of the Act, in performing its task of "protecting the general provisions of the Act", cannot be allowed to negative the Act's specific and particular provisions, of which s. 77A is one. To so understand s. 260 would be wholly out of accord with general principles of statutory interpretation. Menzies J. recognized this when he remarked, in Ellers Motor Sales Pty. Ltd. v. Federal Commissioner of Taxation [20] , that it was not to be thought that the specific provision of which the taxpayer had there taken advantage "was given merely to be taken away by the operation of s. 260", and see Federal Commissioner of Taxation v. Casuarina Pty. Ltd., especially per Gibbs J. [21] . 1. (1969) 121 C.L.R. 665, at p. 677. 2. (1971) 127 C.L.R., at p. 105. It follows that, since s. 260 is inapplicable and since no question of any sham transaction is involved, the Mullens group are entitled to the deductions claimed by them arising out of this first transaction. Their appeals in respect of it should be allowed accordingly. The second transaction was, as I have said, treated by the learned trial judge as also appropriate for the application to it of s. 260 but, unlike the first, he doubted whether it could be said to involve, in the alternative, a sham; his Honour also reached certain conclusions adverse to the taxpayers concerning the making of the alleged call by Vamgas and concerning its ability to make a call upon other than shareholders on the register. As to these latter two matters I do not desire to add anything to what has been said about them in the reasons for judgment prepared by the Chief Justice. That the second transaction was in any sense a sham must be founded, as his Honour remarked, upon the view that the moneys paid in respect of the calls were truly advances, the taxpayers, the Mullens group, not being beneficial owners of the shares at all. Very little was said on behalf of the Commissioner on this appeal in support of this submission and I do not propose to do more than say that in my view the various steps in the transaction, the purchase of the shares by the Mullens group from Vam Ltd., the payment of moneys to Vamgas on those shares by the Mullens group and the subsequent sale of the shares, then fully paid, back to Vam Ltd., all took place and were realities and not mere shams. That these steps were taken and the entire transaction was entered into only so as to enable the Mullens group once again to place themselves in a position to take advantage of the deductions offered by the provisions of s. 77A is not in doubt; but here again, and for the same reasons as those of which I have spoken in dealing with the first transaction, s. 260 is in my view inapplicable. I would for these reasons allow the appeals concerned with this second transaction as I would the appeals relating to the first transaction.