Re Cordoba Cellars Pty Ltd v the Commissioner of Taxation [1986] FCA 16 (6 February 1986)

FEDERAL COURT OF AUSTRALIA

Re: CORDOBA CELLARS PTY. LTD.
And: THE COMMISSIONER OF TAXATION
No. QLDG7 of 1986
Sales Tax - Federal Court - Injunction

COURT

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Pincus J.

CATCHWORDS

Sales Tax - assessments under s.10(2A) of Assessments Acts - taxpayer asserts all tax due paid - dispute as to quantum of goods sold - notices to debtors of taxpayer to pay moneys to Commissioner - application by taxpayer for declaration and injunctions - whether assessments of this sort may be challenged on ground of excessiveness other than by objection - court's jurisdiction to entertain such a challenge.

Federal Court - jurisdiction - dispute as to quantum of taxable goods sold - assessments under s.10(2A) of Sales Tax Assessment Act.

Injunction - application for interlocutory injunction in tax case - whether taxpayer should succeed where seriously in complete account of its affairs.

Ferderal Court of Australia Act 1979, s.21

Judiciary Act 1901, s.39B

Sales Tax Assessment Act (No.1) 1930, ss.38, Part VIII, s.41(1)

Sales Tax Assessment Act (No.2) 1930, ss.12, 10(2A)

Sales Tax Assessment Act (No.3) 1930, ss.12, 10(2A)

Sales Tax Assessment Act (No.7) 1930, ss.12, 10(2A)

HEARING

BRISBANE
6:2:1986

ORDER

The application for interlocutory relief be dismissed.

The principal application be dismissed.

The applicant pay the respondent's costs of and incidental to these applications, to be taxed.

NOTE: Settlement and entry of orders is dealt with in Order 36
of the Federal Court Rules.

DECISION

This is an application for an interlocutory injunction to restrain the respondent Commissioner until the trial of the application from issuing notices described in the application as being under s.38 of the Sales Tax Assessment Act (No. 7) 1930, and to require him to withdraw a notice already given.

2. There is no s.38 in the Act mentioned, but each of the Sales Tax Assessment Acts which are relevant in the case, namely, Sales Tax Assessment Act (No. 2) 1930, (No. 3) 1930 and (No. 7) 1930, has a provision, namely s.12, which makes s.38 of the Sales Tax Assessment Act (No. 1) 1930 applicable to them.

3. On 22 January 1986, the Commissioner issued assessments under s.10(2A) of the Assessment Acts I have mentioned, namely Nos. 2, 3 and 7, totalling $1,361,147.74. No objections to the assessments have been lodged, but the time for objecting has, of course, not yet expired. However, I am told that the assessments will be disputed in toto.

4. On the same day, 22 January 1986, the Commissioner issued notices under s.38 of the Sales Tax Assessment Act (No. 1) requiring a number of debtors of the applicant to pay to the Commissioner, "forthwith upon that money becoming due by you, that money or so much thereof as is sufficient to pay the tax due by the taxpayer". If the notices in question are complied with by the persons to whom they are given, the applicant will be deprived of such a large part of its prospective income that, according to evidence on behalf of the applicant, it will be placed in a "serious financial position".

5. By an application filed in this court on 3 February 1986, the applicant sought injunctions pursuant to s.39B of the Judiciary Act 1901, to restrain the issue of further such notices and, in effect, a mandatory injunction requiring the withdrawal of the notices already issued. The applicant also sought, pursuant to s.21 of the Federal Court of Australia Act 1976, declarations to the effect that the assessments were wrong.

6. The application for interlocutory relief was heard on 5 February 1986, and it will be seen from the dates that the respondent Commissioner had had little time to prepare for the contest. Nevertheless, apparently conceding the urgency of the matter, he asked for no adjournment, but placed before the court in rather summary form the material which it is said discloses the basis upon which the assessments have been raised.

7. Although the points argued ranged over a wide field, I do not find it necessary to deal with all of them. The substantial issue as to the merits is simply whether the applicant has sold as great a value of taxable goods as contended for by the respondent. There is no question but that if sales of the value asserted by the Commissioner were made, they are taxable. That is, the dispute is one as to quantum.

8. Counsel for the Commissioner, however, took a jurisdictional objection, arguing that this court has no power to grant a declaration that the applicant is not liable to pay the tax assessed and that the court cannot grant an interlocutory injunction pending the resolution of that question. Counsel also argued that, because of the terms of s.10(2A) of the relevant Acts, the court cannot go behind the assessments.

9. It appears to me that, logically, the right course is to consider first the question of whether the court can go, even in a preliminary way, into the correctness of the assessments. I propose to state my views first on the application of s.10(2A) of each of the relevant Assessment Acts. The subsection in question reads as follows:

"Where -

(a) any person makes default in furnishing any
return; or

(b) the Commissioner is not satisfied with the
return made by any person; or

(c) the Commissioner has reason to believe or
suspect that any person (though he may not
have furnished any return) is liable to pay
sales tax,

the Commissioner may cause an assessment to be made
of the amount upon which, in his judgment, sales
tax ought to be levied, and the person shall be
liable to sales tax thereon, excepting so far as he
establishes on objection that the assessment is
excessive."

It will be noted that the provision departs substantially in wording from the conclusive evidence provision of the Income Tax Assessment Acts 1936, namely s.177, which was construed by the High Court in F.J. Bloemen Pty. Ltd. v. The Commissioner of Taxation [1981] HCA 27; (1981) 147 CLR 360. That decision therefore seems to provide no assistance.

10. Counsel for the Commissioner, Mr. Gotterson, argued that, at least where the dispute is merely as to the correctness of the sum in which the Commissioner has purported to assess tax, the proper construction of s.10(2A) is that the liability which attaches on assessment may be displaced only by lodging an objection which turns out to be successful. Counsel conceded that the word "objection" in s.10(2A) is capable, in some contexts, of referring, for example, to a defence raised in an action for the tax, but he said that here the word must bear the meaning it has in Assessment Act (No. 1) Part VII, which is made applicable to assessments under the other relevant Assessment Acts, namely, Nos. 2, 3 and 7, by s.12 of each of those Acts.

11. As to the meaning of the word "objection" in this context, in my view Mr. Gotterson's submission is plainly correct. It will be noted that the liability mentioned in s.10(2A) is not stated to attach when the Commissioner merely purports to assess. For example, if the Commissioner issued an assessment under par.(a) of subs.10(2A), but there had in fact been no such default as mentioned in that paragraph, the assessment would seem simply to be bad, and the provision as to liability attaching would presumably not apply. I will not trouble to reiterate this point, but all I have to say about the subsection is subject to that qualification. Here, however, it is not contended that the assessment is bad in that sense. It is simply said to be erroneous because of a wrong view of the Commissioner as to the quantum of goods sold. It is true that a construction in accordance wih Mr. Gotterson's submission does not give the narrowest possible meaning to the word "excessive", because the applicant's real case is that it has paid all the tax due. However, on the proper construction of s.10(2A), it appears to me to apply even when the excess is said to be total. It would be absurd to treat the provision as applicable where a sum, however small, is admitted to be due, but inapplicable when the whole sum is disputed.

12. Counsel directed my attention to the fact that assessments under s.10(2A) of Sales Tax Assessment Acts were in issue before Brennan J. in Brayson Motors Pty. Ltd. v. Commissioner of Taxation (1983) 57 ALJR 288, where a similar application was made and filed, and were also presumably in issue in the Full High Court decision of Brayson Motors Pty. Ltd. (In Liquidation) v. The Commissioner of Taxation (1985) 59 ALJR 413. In neither report is any reference to be found to the point taken by the Commissioner in this case.

13. Mr. Gotterson argued that, assuming these cases are to be regarded as authorities on the question, they are distinguishable because the issue in the Brayson cases was not whether the right quantum of goods had been taxed, but whether any tax at all was exigible in respect of transactions of the sort there in question. I do not find the distinction entirely satisfying, for in the Brayson litigation the taxpayer was not concerned to show itself to be entirely free of tax. The question was whether it was taxable on that part of its business which consisted in retail sales.

14. Another possible explanation of the point's not having been taken in the Brayson case before Brennan J. is that the High Court is in a special position in respect of the original jurisdiction vested in it by section 75(v) of the Constitution. In the Bank of New South Wales v. The Commonwealth [1948] HCA 7; (1948) 76 CLR 1 at p 357, Dixon J. said of the original jurisdiction granted by the Constitution to the High Court:

"As it is beyond the power of the Parliament to
withdraw any matter from the jurisdiction conferred
by s.75, an enactment, insofar as it attempts to do
so, must be invalid."

That proposition has been applied in a number of cases dealing with prohibition and mandamus under s.75(v) where the Commonwealth legislature has sought to limit the power of the High Court to issue prerogative writs against certain officers of the Commonwealth - see, for example, the Tramways case (No. 1) [1914] HCA 15; (1914) 18 CLR 54, and R. v. Blakeley [1950] HCA 40; (1950) 82 CLR 54 at p 71.

15. Another suggested method of reading down s.10(2A), so as to give it some effect but to enable a challenge to an assessment caught by it, is to treat it as merely affecting onus, so that it is read as if "prima facie" were inserted before "liable to sales tax thereon". That does not seem a plausible intention to attribute to the legislature. It would make little sense to say that the person assessed is prima facie liable except insofar as he establishes that the assessment is excessive.

16. The question, in essence, is to my mind whether or not the relevant part of s.10(2A), referring to liability, has any practical effect at all. The scheme of the statutes is that liability for tax is created by the occurrence of the sales of the requisite description. The statement in s.10(2A), that on the issue on an assessment there is liability, can hardly have been intended merely to repeat the proposition that, if the statutory conditions exist, there is liability. It must have been intended to creat a liability having a quality different from that which arises merely on the occurrence of the relevant sales, and that quality, as it seems to me, must be that the liability subsists unless and until it is established, on objection, not to subsist.

17. It is my view that s.10(2A) was probably intended to interlock with the objection provisions in Sales Tax Assessment Act (No. 1) which are made applicable to the other Assessment Acts by provisions in the latter. Section 41(1) of Assessment Act (No. 1) which gives the right of objection, applies it to -

"A taxpayer who considers that any amount upon which
he is required to pay sales tax in respect of any
goods is not the sale value of those goods as
declared by this Act or who is dissatisfied with
any assessment or decision made by the Commissioner
under this Act by which the sale value of any goods
is ascertained ..."

In M. R. Hornibrook (Pty.) Ltd. v. The Federal Commissioner of Taxation [1939] HCA 29; (1939) 62 CLR 272, a question arose whether a contractor was liable, at all, to pay sales tax in respect of bridge piling. The case came to the High Court on appeal from a board of review to which objections had been referred under s.41(1). Both the Chief Justice and Rich J. said that the objections came within s.41 - the former at p.280 and the latter at p.282. Latham C.J. said:

"The objection of the taxpayer is that there is no
amount or value upon which he is bound to pay tax,
that is, that the alleged amount or value should,
for the reasons relied upon him, be reduced to nil.
In my opinion, therefore, the board of review did
have jurisdiction to determine the objections
raised by the taxpayer."

18. It may well be that the liability mentioned in s.10(2A) was intended to be coextensive with the jurisdiction of the board to determine objections to assessments under that subsection. That is, the scheme appears to be that, in cases in which an objection might be made to a board of review, and on the authority of the Hornibrook case this is plainly one, that is the only means whereby the liability created by s.10(2A) can be displaced, given an assessment made in circumstances falling within one of the three categories in the subsection.

19. Mr. Gallagher Q.C., who appeared with Mr. Morris for the applicant, pointed out in his helpful argument that in Deputy Commissioner of Taxation v. Hankin [1959] HCA 2; (1959) 100 CLR 566, Dixon C.J., Fullagar, Kitto and Windeyer JJ. said in their judgment at p 578:

"The result is that a taxpayer, who is dissatisfied
with an assessment of the Commissioner, may refuse
to pay the amount assessed, and, when he is sued by
the Commissioner, may take any objection to the
assessment other than the objection that some
required formality has not been observed. No
liability to pay tax is 'incontestably' imposed."

However, that case was concerned with an assessment under the Sales Tax Assessment Act (No. 5) which has never had a s.10(2A) inserted in it and, therefore, does not appear to govern the matter.

20. Another possible view, as mentioned above, is that the use of the word "excessive" in s.10(2A) shows that only in cases in which the dispute relates purely to amount or value is the taxpayer's right of challenge to s.10(2A) assessments confined to objection and the procedures consequent upon that. The advantage of that construction is that it accommodates the Brayson Motors decisions. It does not, however, strike me as a reasonable meaning to attribute to the words used. It is not necessary to reach a final conclusion on that aspect, however, because even if the narrower view just mentioned be taken, the effect of s.10(2A) is that, at this stage, the applicant is deemed to be liable. I say "deemed" because it is plain that the liability spoken of is not an absolute one. What is meant is that, unless and until successful objection is made, the taxpayer, having received a s.10(2A) assessment, must be taken to be liable.

21. I am therefore obliged, on the construction I have mentioned, to come (somewhat reluctantly) to the view that the position of persons such as the applicant at present is that there can be no challenge to the assessment in this court with respect to the amount or value of goods sold. Unless and until an objection is lodged, and upheld, the applicant must, by reasons of the words with which s.10(2A) concludes, be taken to be liable.

22. As I have implied, this seems to me to be an unsatisfactory position. Mr. Gallagher Q.C. argued that an actively trading company, such as the applicant, might be forced into liquidation by a s.10(2A) assessment followed by the issue of notice under s.38 of the Sales Tax Assessment Act. (No.1) well before there is time to get a final decision on an objection lodged. Further, the system appears lack a degree of rationality in that the Commissioner is given a choice, either to sue for the tax claimed - as this liability attaches by reason of the occurrence of a relevant sale and not only on assessment - or to issue a s.10(2A) assessment. If the Commissioner takes the latter course, the person assessed is caught by the words of s.10(2A) as construed in these reasons and, on that view, is subjected to a substantial procedural disability which may well be fatal to his financial position. I have found myself unable, however, to attach any plausible meaning to the relevant part of s.10(2A) other than the construction set out above.

23. It is not clear whether, in circumstances of this sort, it is right for a court to go further into the matter. But it seems to me unnecessary to discuss the other question raised by Mr. Gotterson, namely whether or not this court could, were it not for the point just discussed, grant a declaration of non-liability; I shall not express my view on that.

24. However, particularly since Mr. Adam, the applicant's accountant, gave evidence before me, it seems desirable, in case the matter goes on appeal, to state my view on the merits. Essentially, the dispute between the parties is as to the amount of wine and spirits sold during the period covered by the assessments. According to Mr. Adam, there is a discrepancy, rounding the figure off, of about $2.6 million between the prices set out in the schedules to the assessments and the prices obtained by him from the applicant's invoices, so far as is available to him. However, that does not account for the whole of the difference between the parties, because on the respondent's case the quantum of sales in respect of which no tax has been paid is about $4.7 million. Assuming, then, that Mr. Adam is right about the total value of the invoices which he has examined, on the Commissioner's case there is a gap of about $4.7 million between the value of those invoices and the true amount of the sales.

25. Mr. T. J. Costello, an officer of the Taxation Office, has sworn that he has been in charge of investigating the applicant's sales tax affairs. He says that large sales of wines and spirits were made by the applicant but not recorded in any of those records produced to the Taxation Office. He deduced this from examination of the records of persons who supplied the applicant and also examination of delivery dockets of transport operators. As to the latter, he claims to have found numerous instances of deliveries shown in transport dockets but not recorded as sales in the documents produced by the applicant. It does not appear, however, that the transport dockets were taken into account in making up the assessments. The figures on which they were based were obtained from the applicant, and to them were added invoices obtained from other persons said to have supplied goods to the applicant.

26. Of course, the method adopted could well have led to the issue of inaccurate assessments because, as Mr. Costello said, he has been unable to reconcile the invoices examined with the monthly returns. However, it is clear that the difference between the parties is not merely a difficulty in reconciliation. The respondent's case is that, to a much greater degree than likely to be explained by mechanical or bookkeeping errors, there has been a failure to disclose sales.

27. Mr. Gallagher Q.C. argued that, assuming his success on the preliminary question dealt with above, an injunction should be granted because there is shown to be a serious question to be tried, and the balance of convenience favours the applicant, which may be financially crippled before resolution of the principal dispute. He pointed out that not only had the issue of the s.38 notices prevented access by the applicant to large sums due to it, but it has also done substantial damage to its credit and business reputation.

28. Undertakings were offered on behalf of the applicant designed to preserve the respondent's position pending the final resolution of the dispute. These included undertakings to provide some security, but it was not suggested that the value of the security provided would equal the amount of the assessments.

29. In the ordinary case, but for my view on the preliminary point, I would regard the submissions just mentioned as having considerable substance. Were the Commissioner to be regarded merely as asserting a liability, then his right to issue a notice under s.38 would be entirely dependent upon its existence. If a serious question as to the existence of that liability were shown, there could be a good case (aside from jurisdictional questions) to restrain the taking of steps under s.38, pending the resolution of the principal question. However, there is here a particular reason for declining to exercise a discretion in favour of the applicant, namely that the only evidence opposed to that of Mr. Costello is that of Mr. Adam, and there is evidence that Mr. Adam has not enough knowledge of the applicant's affairs to justify my acting upon his view of the matter.

30. Mr. Costello's affidavit says that he discovered that Mr. Miguel Salerno, who is apparently in control of the applicant's affairs, operates a bank account at Westpac Banking Corporation, Bundall under the style "Cordoba Cellars Account". When that affidavit was read yesterday, Mr. Gallagher Q.C. told me he wished to call evidence in explanation, and he told me, in effect, that the Westpac account was the only one. He then called Mr. Adam to confirm that. It emerged, however, that there are two other substantial bank accounts associated with the applicant, both with the Australia and New Zealand Banking Group Limited at Bundall in Queensland. The name of one of those is Miguel Salerno Cordoba Cellars W.H., and the name of the other is Cordoba Cellars Pty. Ltd.

31. There have recently been substantial transactions through these accounts. For example, over $340,000 was debited to the former in October 1985. Mr. Adam apparently has no knowledge of the two accounts, although he is the accountant responsible for all accounting by companies in the Salerno group of companies and associated companies, and is, of course, responsible in particular for the applicant's accounts.

32. If, as appears to be the case, the applicant's accountant has been unaware of such substantial transactions recently entered into by the applicant, there is no reason for confidence that he knows enough about the applicant's financial affairs to justify my acting upon his affidavit. It was argued for the applicant that I should ignore these additional bank accounts because they were not proved to be relevant to the liquor sales in question, but Mr. Salerno, who presumably knows their role in the applicant's affairs well enough, was not called; nor was his absence explained.

33. Further, according to Mr. Adam's affidavit, he particularly relied upon examination of the applicant's bank statements and cheque books to satisfy himself that the invoices in his possession are complete. It seems clear enough that he does not have the bank statements and cheque books in their entirety. I would, therefore, not have been prepared to grant an injunction, apart from my view as to the construction of s.10(2A) of the Sales Tax Assessment Acts in question.

34. I should add that an attack was made on Mr. Adam's credit, but I do not decide the matter on the basis of disbelieving him. He may, perhaps, have given a substantially accurate account of the applicant's dealings so far as the documents available to him permit him to do so.

35. Since the respondent now asks that, in view of the grounds of decision on the interlocutory application, the principal application also be dismissed, and that is not resisted, I shall so order.

36. The orders will therefore be:

(1) that the application for interlocutory relief be dismissed;

(2) that the principal application be dismissed;

(3) that the applicant pay the respondent's costs of and

incidental to these applications, to be taxed.