Re Jennings Industries Limited v the Commissioner of Taxation of the Commonwealth of Australia [1983] FCA 349 (20 December 1983)

FEDERAL COURT OF AUSTRALIA

Re: JENNINGS INDUSTRIES LIMITED
And: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
No. VG222 of 1983
Income Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Sweeney J.

CATCHWORDS

Income Tax - Application for leave to appeal against a decision of the Supreme Court of Victoria - substantial question to be determind - importance to the taxpayer - questions of general importance involved.

Income Tax Assessment Act 1936: ss. 25(1); 26(a); 26AAA; 196(5)(a).

HEARING

MELBOURNE
20:12:1983

ORDER

1. Leave be granted to the applicant to appeal.

2. Costs be reserved.

DECISION

This is an application by Jennings Industries Limited (the taxpayer) for leave, pursuant to s. 196(5)(a) of the Income Tax Assessment Act 1936 (the Act) for leave to appeal to a Full Court of this Court from a decision of the Supreme Court of Victoria, constituted by Mr Justice Marks, on an appeal to that Court from a decision of Commonwealth Taxation Board of Review Number 2, upholding the Commissioner's amended assessment, notice of which was issued on 15 July 1977, in respect of income derived by the taxpayer during the year ended 30 June, 1974, which imposed on the taxpayer a liability in respect of $153,457 received in that income year on disposal of shares in a company, Tower Property Development Pty Ltd (T.P.D.), which owned a building at 45 Grenfell Street, Adelaide. In its judgment, the Supreme Court increased the assessment to the amount of $160,628 and otherwise dismissed the appeal, with costs.

In 1972 the taxpayer and Investment & Merchant Finance Corporation Ltd (I.M.F.C.) entered into a joint venture to form T.P.D. as a company to be owned by them in equal shares, to erect the Grenfell Street property. It was agreed that the taxpayer should be given the contract to carry out the necessary building operations.

It was the taxpayer's contention that the sale of the shares, which gave rise to the assessment, was on its capital account, the shares not having been acquired for the purpose of profit-making by sale nor from the carrying on or the carrying out of any profit-making undertaking or scheme within the meaning of the second limb of s. 26(a) of the Act. The transaction, it submitted, was not in trading stock or otherwise on its income account.

The Supreme Court heard detailed evidence in relation to the joint venture, and the sale of the shares, and many other transactions of the taxpayer, which were regarded as having a bearing on the liability of the taxpayer. It considered the questions of fact involved in relation to the possible application to them of ss. 25(1), s. 26(a) and 26AAA of the Act. It also decided that it had the power to increase the assessment, and did so.

After reviewing the evidence, Mr Justice Marks said:

"In the light of my understanding of and observations on the evidence and its limitations, I consider that there are chances that one or more of the following conclusions are correct:

(a) that the shares in T.P.D. from which the taxpayer derived capital accretion on sale were acquired by it for at least two purposes, one to obtain a building contract in furtherance of its profit-making building construction business, the other for permanent investment for dividend

yield and that the latter purpose was not dominant;

(b) that the share acquisition was for the purpose of profit-making by sale;

(c) that the dominant purpose of the share acquisition was to secure the building contract for its profit-making building construction undertaking so that such acquisition was an integral part of that undertaking;

(d) that the share acquisition and sale was in the course of the taxpayer's ordinary income producing building and development business;

(e) that the share acquisition was for the purpose of carrying on or carrying out of a profit-making undertaking of property investment, entailing receipt of income from office space rentals and alternatively acquisition and disposal of properties themselves as returns, values and market dictated or advised.

These chances are all so high that the taxpayer has not satisfied me that such conclusions are incorrect. It follows that the taxpayer has failed to discharge its burden of proof that the amended assessment of the Commissioner was excessive, in other words, that the Commissioner was not entitled to make the said assessment pursuant to s. 25 alternatively s. 25(1) in combination with s. 26(a) of the Act.

The result is that the taxpayer's appeal fails and it is unnecessary to consider the arguments in relation to s. 26AAA."

His Honour also observed that:

"Although the Commissioner originally made the amended assessment by reference to s. 26AAA it is clear that he did not then have available to him all the documentary and other information which has come to light in the meantime. In the circumstances, I think I should make the order he seeks.

There will be an order that the amended assessment notice of which was issued July 15th, 1977, be increased by substituting $160,628 for the figure $153,457. Otherwise the appeal is dismissed with costs including the costs of recorded notes."

In the Supreme Court hearing counsel for the Commissioner did not attack the

credibility of the witnesses called by the taxpayer, as distinct from challenging the accuracy of their recollection.

Counsel for the taxpayer drew attention to the importance to his client, a public company, and to its many shareholders of clarity in relation to the precise nature of its reserves, lest any question should arise under s. 44(2) of the Act. He pointed to the evidence of a like transaction in relation to a property at Cairns, and submitted that any uncertainty as to whether it was of a capital, rather than income, nature, could have serious consequences for the taxpayer and its shareholders, which would be set at rest by a decision on appeal in this case.

There are three reported decisions concerning applications for leave to appeal such as the present:

Lombardo v Federal Commissioner of Taxation [1979] FCA 65; (40 FLR 208)
Federal Commissioner of Taxation v Nixon (79 ATC 4512)
Federal Commissioner of Taxation v Forsyth (79 ATC 4577)

The case clearly involves the determination of a substantial question, which

is of importance to the taxpayer.

In my opinion, it also gives rise to questions of general importance, including the application proper to be given to ss. 25, 26(a) and 26AAA of the Act and the question of the power of the Supreme Court to increase the assessment. In my opinion, it is a case in which there should be a grant to the taxpayer of leave to appeal and it is so ordered. Costs are reserved.