Emu Bay Railway Company Limited v Federal Commissioner of Taxation [1944] HCA 28

Dist

AEE Come FeTy ARE 'Appl Layala Taxation Australian Australian FHlepries Pay 4 FLR 73 eet am Hd (in igh Gorrcr Aa $4 ee Hee ATR 502 596 HIGH COURT : [1944. [HIGH COURT OF AUSTRALIA] EMU BAY RAILWAY COMPANY LIMITED . APPELLANT; AND FEDERAL COMMISSIONER OF TAXATION . Rusponpent. H.C. or A. Income Tax (Cth)—Assessment—Deductions — " Outgoings incurred in 1944, gaining or producing the assessable income "—Company—Stock—Interest payable aw out of net annual income—Income insufficient to pay interest—Income Tax MeErpourne, Assessment Act 1936-1940 (No. 27 of 1936-—No. 65 of 1940), s. 51. Oct. 3; oe 'A company and trustees for its creditors entered into a debenture trust deed

M 'Williams JJ.

whereby the company undertook to issue debenture stock to the creditors and stock certificates in a form prescribed by the deed were issued accordingly. By the deed, the company acknowledged itself indebted to the stock holders in a specified sum which, until redemption, was to bear interest payable half- the interest was "to be a charge upon and payable only out of the net annual income of the company." 'The company covenanted to pay the amount of the stock and interest thereon in accordance with the terms of the deed and charged its assets in favour of the trustees to secure the payment of the stock and interest, 'The deed created a trust for sale and empowered the trustees in certain events to enter into possession of and realize the assets. Tt also contained a provision that, during a period which had expired before the income year 1939, the interest on the stock "shall be payable only out of the net income of the company . . . and after the expiration of such period the interest . . . shall be cumulative." The company did not in the year 1939 or thereafter pay or credit to the stock holders any sum for interest in respect of that year. It had no net income in that year; in fact, as appeared from its profit and loss account, it incurred a loss. Nevertheless, unless it was entitled to a deduction in respect of the interest, it had a taxable income for the purposes of the Income Tax Assessment Act 1936-1940. It was assessed to tax on that income by the Commissioner, who refused to allow