Re EHL Burgess Pty Ltd v the Commissioner of Taxation of the Commonwealth of Australia [1988] FCA 249 (19 July 1988)

FEDERAL COURT OF AUSTRALIA

Re: E.H.L. BURGESS PTY LTD
And: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Nos. VG19 and 20 of 1988
Income Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Woodward(1), Davies(1) and Burchett(1) JJ.

CATCHWORDS

Income Tax - Appeal from the Administrative Appeals Tribunal - sale of shares in company with potential taxation liability - disposition of company's funds - whether transactions amounted to misappropriation of company funds - whether transactions infringed the Companies Act 1961 - the application of s.71 of the Income Tax Assessment Act 1936 (Cth) - the distinction between acts of the company and acts of its employees or agents - whether considerations of public policy are relevant.

Income Tax Assessment Act 1936 (Cth) - s.71

Taxation (Unpaid Company Tax) Assessment Act 1982 (Cth) - s.18

Companies Act 1961 - s.67

R. v. Roffel (1985) VR 511.

HEARING

MELBOURNE
19:7:1988

Counsel for the Applicant: Mr A.J. Myers Q.C. with Mr J. de Wijn

Solicitors for the Applicant: Cooper Korbl & Co

Counsel for the respondent: Mr B.J. Shaw Q.C. with Mr G.T. Pagone

Solicitors for the respondent: Australian Government Solicitor

ORDER

The appeals be dismissed with costs.

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

DECISION

These are appeals from a decision of the Administrative Appeals Tribunal which affirmed a decision of the respondent, the Federal Commissioner of Taxation, disallowing objections made to the assessment of income tax of Burgess Veneer Co. Pty Ltd ("Burgess Veneer") for the year ended 30 June 1980. The appeals are brought by E.H.L. Burgess Pty Ltd, the applicant, which had been nominated pursuant to sub-section 18(3) of the Taxation (Unpaid Company Tax) Assessment Act 1982 (Cth) ("The TUCT Act" to exercise its rights and the rights of Burgess Furniture Pty Ltd as vendor shareholders in Burgess Veneer.

2. The issue in the appeals relates to the operation of s.71 of the Income Tax Assessment Act 1936 (Cth)("the Act") on the facts that we shall later outline. Section 71, which was one of the original sections of the Act and which was slightly amended by Act No. 69 of 1963, now reads:-

"Where a loss incurred by the taxpayer through
embezzlement, larceny, defalcation or misappropriation
by a person, including an agent, employed by the
taxpayer, not being a person employed solely for
private or domestic purposes of, or in respect of, money
that is or has been included in the assessable income of
the taxpayer is ascertained in the year of income, that
loss shall be an allowable deduction."

Mr B.J. Shaw Q.C., with whom Mr G.T. Pagone appeared for the respondent, the Commissioner of Taxation, submitted that s.71 should be interpreted having regard to the provisions of the TUCT Act and in a manner which would accord with Parliament's intention as ascertained from the TUCT Act. However, s.71 provides for a specific deduction. It must be interpreted according to the words which it uses and the context in which it appears, not by reference to the TUCT Act which was enacted at a later time and which deals with a different subject matter.

3. In the early months of 1980, Burgess Veneer conducted a prosperous manufacturing and sharetrading business. Mr E.H.L. Burgess and his sister, Shirley Burgess, were the directors of Burgess Veneer, of the applicant and of Burgess Furniture Pty Ltd. The latter two companies each held one of the two shares issued by Burgess Veneer and the applicant was the beneficial owner of both. In the eleven months up to 31 May 1980, Burgess Veneer had a net income of $3,410,950 in respect of which it expected to have a tax liability of $1,569,041. Mr Burgess was advised by his accountant, Mr R.W. Parry, that a sale of the two shares to a person interested in purchasing companies with taxable profits would be legal.

4. With a view to facilitating the sale of the shares, the debts of Burgess Veneer were paid and the business and assets of the company were sold to other companies in the Burgess group of companies. A balance sheet of the company drawn up as at 10:30 a.m. on 30 June 1980 showed Burgess Veneer as having cash at Bank of $4,067,311, a Provision for Taxation of $1,569,041, Goodwill of $1,398,491, a Revaluation Reserve of $1,948,493 and an Unappropriated Profits Reserve of $1,948,268. The total shareholders funds of $3,896,763 were represented by the cash at bank plus goodwill (purely notional) less the provision for taxation. A discrepancy of $2 is the result of the rounding off of the two figures.

5. There was no evidence before the Tribunal as to how the moneys representing the profits of the year had been applied. A possible course was that the profits made during the year were used to pay off the liabilities of Burgess Veneer, there being more than $4,239,205 owing by that company to associated companies as at 30 June 1979. However, there was no evidence as to that and the Tribunal made no comment about it. Nor was there evidence as to the amount of the capital sum realised from the sale of the business and assets of Burgess Veneer. It may be that the sale price closely approximated the $4,067,311 cash which the company had in its bank account as at 30 June 1980, for one of the assets which Burgess Veneer held as at 30 June 1979 was "Shares in Private Company - at Cost $3,270,131". This item alone, if added to plant and trade debtors as at 30 June 1979, would have amounted to more than $4m. The evidence therefore did not show whether the money held as at 30 June 1980 could be traced to income or profits or whether it merely represented the sale price of long held capital assets. The Tribunal made no comment on this aspect of the matter, the significance of which arises from the words in s.71, "that is or has been included in the assessable income of the taxpayer."

6. It was arranged to sell the shares to Taxation Advisers Pty Ltd, a company associated with Mr Colin Coghill and Mr John Edwards. The sale price was $3,896,763, a sum identical with the shareholders' funds, calculated as previously mentioned.

7. Early in the morning of 30 June 1980, a bank cheque for $4,067,311 drawn in favour of Burgess Veneer, and representing the whole of the assets of that company, was handed by Mr Parry to a representative of Taxation Advisers Pty Ltd. In exchange, a cheque for $3,896,763, the agreed price of the shares, was handed to Mr Parry. Mr Burgess and his sister resigned as directors. The transfer of the shares was dealt with, or at least was purportedly dealt with, by an agent in Darwin, for steps had been taken with a view to putting the shares on a Darwin register to avoid stamp duty. Messrs Coghill and Edwards were appointed directors of Burgess Veneer. The bank cheque for $4,067,311 was paid into an account which had been opened some days earlier in the name of Burgess Veneer by Messrs Coghill and Edwards. The sum was immediately withdrawn and paid to Khumba Pty Ltd, presumably a company controlled by Messrs Coghill and Edwards. It was recorded by that company as a sundry loan. The sum was then immediately paid by that company to Taxation Advisers Pty Ltd. Messrs Coghill and Edwards resigned as directors of Burgess Veneer. Other persons were appointed in their place but it does not appear that they played any part in the affairs of Burgess Veneer.

8. All that occurred on 30 June 1980. After that date, Burgess Veneer had no assets and carried on no activity. No return of income was lodged for the year ending 30 June 1980.

9. The crux of the case put to the Tribunal on behalf of the applicant in the appeals was that the directors of Burgess Veneer, Messrs Coghill and Edwards, had, on 30 June 1980, fraudently taken or misappropriated the whole of the assets of Burgess Veneer, amounting to $4,067,311, that the sum so lost to Burgess Veneer included the profits of $3,410,950 representing its taxable income for the year and, therefore, that Burgess Veneer was entitled to a deduction under s.71 of the Act and, in the result, had no taxable income for the year.

10. Mr A. J. Myers Q.C., with whom Mr J. de Wijn appeared for the applicant, submitted that the Tribunal made few findings of fact and that its description of the facts was a mere recitation of the evidence before it. Mr Myers submitted that the Tribunal's reasoning proceeded on the basis of assumed facts. Mr Myers pointed to para 32 of the Tribunal's reasons which stated:-

"As Mr Myers pointed out, the applicant in this case
faced formidable difficulties of proof. Nevertheless,
even on the assumption that all facts necessary to
establish the applicant's case as stated above have been
proved, I am of the opinion that the applicant must
fail."

However, the Tribunal did not leave the matter at large as Mr Myers suggested. There was no significant dispute as to the primary facts before the Tribunal. As we read the Tribunal's decision, the Tribunal set out the primary facts as it found them. When the Tribunal referred to evidence, eg, that "Mr B said that ...", the Tribunal was referring to the evidence that, in its view, set out the probable position.

11. Nevertheless, paragraph 32 does raise difficulties, for it is clear from the overall reasons of the Tribunal that the Tribunal did not either assume or conclude that all the facts necessary to establish the deduction under s.71 had been established. The Tribunal in fact concluded that principal factual elements of s.71 had not been established, and that it did not have to go on to consider other elements.

12. Had the Tribunal directed its attention more closely to the precise terms of s.71, it may have made findings of fact with respect to all the essential elements of s.71. Such findings would have enlightened the Tribunal's reasons for decision and assisted any appellate Court. It is desirable that an appellate court, which may take a different view on a point of law, should have before it unambiguous findings on the material facts of the case.

13. As the Tribunal did not deal with all aspects of s.71, we shall consider the application of the section in some detail before turning to the Tribunal's reasons for decision. In doing so, we shall comment upon factual issues that were not considered by the Tribunal. We nevertheless keep in mind that, if the result of the appeals turned upon facts not found by the Tribunal, the matter would have to be remitted to the Tribunal to be heard and decided again. The Tribunal and not this Court is the judge of the facts. The appeal to this Court raises points of law only. See s.44 of the Administrative Appeals Tribunal Act 1975 (Cth) and Waterford v. The Commonwealth of Australia [1987] HCA 25; (1987) 61 ALJR 350 at 359.

14. The following elements are involved in s.71:-

(i) the taxpayer must incur loss;

(ii) the loss must result from embezzlement, larceny,
defalcation or misappropriation (here generally
referred to as "misappropriation");

(iii) the misappropriation must be by a person
(including an agent) employed by the taxpayer,
not being a person employed solely for private
or domestic purposes;

(iv) the misappropriation must be of or in respect of
money that is or has been included in the
assessable income of the taxpayer; and

(v) the loss must be ascertained in the year of
income.

15. Having regard to the context in which they appear, we take the words "defalcation or misappropriation" to refer to a fraudulent defalcation or misappropriation, that is to say to an act that would support a prosecution for theft, using that term in its widest sense. In the context, the words are not apposite to refer to a loss brought about by mere negligence or inadvertence. However, the meaning of the words is not decisive or of crucial importance, for there was adequate evidence that what was done by Messrs Coghill and Edwards was done with an intention deliberately to strip Burgess Veneer of its assets, with $3,896,763 of those assets being passed to the applicant and with the balance, $170,548, being the gross profit on the transaction, passing to their company, Taxation Advisers Pty Ltd.

16. It is clear that what was done was wrong. In the first place, it infringed basic principles of company law. As Brooking J. said in R. v. Roffel (1985) VR 511 at pp 525-6:-

"Although, as in the present case, only $2 may have been
subscribed, the protection given to creditors extends to
the whole of the assets of the company, in the sense
that it can make no payment to its shareholders except
by way either of division of profits or of authorized
reduction of capital: Hill v. Permanent Trustee Co. of
New South Wales (1930) AC 720, at p 731. The basic
principle has the result that every transaction between
a company and any of its members, by means of which any
capital is repaid to him, is prohibited, unless the
court has sanctioned the transaction; moreover, since
the transaction is prohibited and void, it cannot be
ratified even by the unanimous decision of the
shareholders: Re Exchange Banking Co.; Flitcroft's Case
(1882) 21 ChD 519; Trevor v. Whitworth (1887) 12 App.
Cas. 409; Davis Investments Pty. Ltd. v. Commissioner of
Stamp Duties (NSW) [1958] HCA 22; (1958) 100 CLR 392, at p 413;
Australasian Oil Exploration Ltd. v. Lachberg [1958] HCA 51; (1958) 101
CLR 119, at p 132. It is true that where, in
disregard of the company law, an informal liquidation
has taken place, the shareholders to whom the assets
have been distributed may ultimately become the owners
of them, as in Federal Commissioner of Taxation v.
Blakely [1951] HCA 17; (1951) 82 CLR 388, where the creditors had
all been paid and the company had been dissolved as
defunct: see the observations of Fullagar J., at
pp.401-2. But one must not let the possibility that
title will be found ultimately to have passed to obscure
the legal position which obtains at the time of the
original attempted disposition. That disposition is not
merely voidable: it is impliedly prohibited by the
statute law dealing with companies and is void."

The transaction also seems to have breached s.67 of the Companies Act 1961, which then made it unlawful for a company to give financial assistance to the acquisition of its own shares. The transaction undoubtedly breached duties which Messrs Coghill and Edwards had to Burgess Veneer as its directors. And, finally, there is an inference that what was done by Messrs Coghill and Edwards was done with a view to defrauding the Commonwealth of the taxation which was to become due on the taxable income of the company for the year ended 30 June 1980.

17. But to say all that is not to say that the criteria prescribed for the operation of s.71 have been satisfied. There are a number of indications in s.71 that the section is not concerned with a transfer of funds that constitutes an act of the taxpayer itself or a transfer of a taxpayer company's capital or profits to shareholders.

18. The words "embezzlement", "larceny", "defalcation" and "misappropriation" themselves may require that such an approach be taken. In R. v. Roffel, cited above, the Full Court of the Supreme Court of Victoria had to consider an instance where the applicant and his wife had been the sole shareholders and directors of a small proprietary company. In 1979, the premises occupied by the company were destroyed by fire. Insurance proceeds were paid into the company's bank account. The company had a number of trade creditors but the assets of the company, including the insurance proceeds, were insufficient to meet the claims of all creditors. The applicant, being authorised to sign the company's cheques, drew five cheques upon the company's account, of which four were payable to cash and the fifth was payable to a travel agency. He was charged and convicted on five counts of theft. Young C.J. and Crockett J., with Brooking J. dissenting, upheld an appeal against the conviction. At pp.514-515, Young C.J. said:-

"In the present case, it is necessary to ask upon what
act of appropriation the Crown relies to prove the
theft. Since it is, in the four counts presently under
consideration, the theft of money that is alleged, the
Crown doubtless relies upon the receipt of the money
from the company's bankers as the act of appropriation.
But where is the element of usurpation of the company's
rights in the act of receiving the money? The cheque
was the company's cheque, made payable to cash and in
the possession of the applicant who was the de facto
controller of the company. There was no evidence to
suggest that the company did not intend the applicant to
have the money and to use it for his own purposes. If
the company decided to give the money to the applicant
in order to defeat its creditors, that would be quite
irrelevant. The motive of the company in making the
gift could not convert the applicant's act in receiving
the money into a usurpation of the company's rights.
... (E)ven if the act of the company were void, the
directing mind and will of the company still concurred
in the applicant's receiving the money for his own
benefit and thereby precluded his receipt of it from
being an appropriation within the meaning of the Crimes Act."

At p.522, Crockett J. said:-

"It remains then to determine whether in the light of the
foregoing discussion there was evidence upon which an
appropriation could be found on the facts of the present
case. The applicant appears to me clearly to have been
identified with the company at the relevant time.
Whether what the company did through the agency of the
applicant was dishonest vis-a-vis the trade creditors or
was ultra vires the company is not to the point. By the
instrumentality of the only person through which it
could effectively act it consented to entry into the
impugned transactions. They were thus not unilateral.
Or, to describe it in the terms of Morris, by reason of
its very acquiescence in the drawing of the cheque on
its funds the company was not acting so that it could be
said the applicant was adversely interfering with or
usurping some right of ownership possessed by it."

Mr Myers submitted that R. v. Roffel was irrelevant or wrong. He submitted that a transaction which was illegal, as by breaching s.67 of the Companies Act, was void and therefore could not be a transaction of the company. He relied upon Dressy Frocks Pty Ltd v. Bock (1951) 51 SR (NSW) 390 to demonstrate the illegality of what had occurred and upon Selangor United Rubber Estates Ltd v. Cradock (1968) 1 WLR 1555 and Karak Rubber Co Ltd v. Burden (1972) 1 WLR 602 to demonstrate a company's right of recovery against a defaulting agent. See also cases such as In re Anglo-French Cooperative Society; Ex parte Pelly (1882) 21 ChD 492 and In re Sharpe; In re Bennett; Masonic and General Life Assurance Co. v. Sharpe (1892) 1 Ch 154. In our opinion, however, the principle enunciated in R. v. Roffel should be applied to the current circumstances.

19. Section 71 expressly requires that the misappropriation be the act of a person, including an agent, employed by the taxpayer. Before its amendment in 1963, the section used the expression "person employed in the taxpayer's business" which may have been wider, though the operation of the section was narrow because of its restriction to embezzlement and larceny. The Ligertwood Committee recommended that the section be extended to cover defalcation or other forms of misappropriation and also that the embezzlement etc must be committed by an employee or agent of the taxpayer. See paras 173 and 176 of the Committee's report. That was, in our opinion, the effect of the amendment that was made.

20. The section thus distinguishes between events that constitute acts of a taxpayer company by reason of being events in which the directors and shareholders join, and a misappropriation which is merely that of an employee or agent of the company. There is a distinction between a situation where the directors act as the mind and will of the company and a situation where one of a number of directors defrauds the company of moneys owing to it. Section 71 requires that there be a loss incurred by the taxpayer as the result of the act of some other person.

21. The history of the section strongly supports this view. It started out as a provision dealing with acts, not of the taxpayer itself by its agents, but of persons employed in its business. That was expanded, upon the Ligertwood Committee's recommendations, expressly to include persons not strictly employed, being agents. The Committee's report makes it plain, however, that there was no intention to change the nature of the provision, as one dealing with the misdeeds of subordinates, but merely to ensure that the actions of a particular wrongdoer were not excluded because his contract was one of agency rather than of employment.

22. It should further be noted that the loss is deductible in the year in which it is ascertained, that is to say, when it has been recognised and quantified. This provision requires that a person other than the person or persons who made the misappropriation ascertains, on behalf of a taxpayer company, that the company has incurred a loss.

23. In the light of these considerations, the claim made for the deduction could not be successful. In the first place, the payment was made or authorised by the persons who were the two directors of Burgess Veneer, and was made in the interests of the shareholders of Burgess Veneer. The company's funds were passed to them through the medium of Khumba Pty Ltd. There was in substance an informal liquidation of the company's assets. The alleged misappropriation was not a misappropriation by a person employed by Burgess Veneer, but a misappropriation by persons who were the directors of the company and who acted in the interests of its shareholders. Although the word "employed" should be given a wide reading, it does not encompass actions of the Board of Directors acting as such in the interests of the shareholders. Section 71 does not allow a deduction in such a case.

24. It is not even appropriate to describe the transfer of funds as a loss incurred by Burgess Veneer in the year ended 30 June 1980. A loss is not the same thing as an outgoing. A loss is a residual item arrived at after taking into account all relevant debits and credits. On 30 June 1980, Burgess Veneer was entitled to recover the $4,067,311 from Khumba Pty Ltd and Taxation Advisers Pty. There was no evidence that the sum could not on that date have been recovered. There was no evidence that, on that date, the $3,896,763 could not have been traced to the applicant and recovered under equitable principles. The applicant had played a sufficient part in the transaction at least to raise the question whether it was not bound to repay the $3,896,763 paid to it, if called upon to do so. It would have been no answer that the applicant deliberately sought not to know what steps Messrs Coghill and Edwards would take. The applicant knew that it was being paid more for its shares than they were worth and that some scheme to avoid or evade the imminent tax liability of Burgess Veneer would be implemented. Moreover, the cheque for $4,067,311, representing the assets of Burgess Veneer, and the cheque for $3,896,763, the price of the shares, were handed over in exchange for each other. In the circumstances, the applicant may well have been bound to repay to Burgess Veneer, if called upon to do so, such part of the amount of the unlawful distribution of Burgess Veneer's funds as it received. The onus, in these proceedings, lay upon the applicant and it would be difficult to hold that it discharged that onus.

25. It follows that Burgess Veneer, which had paid out the $4,067,311 on 30 June 1980, could not be heard to say that, on that day, it had incurred a loss of that sum. It had merely incurred an outgoing which it is likely it could have recovered if it had sought to do so. It did not seek to do so because, by its directors, it concurred in the transaction.

26. Moreover, if there was a loss that otherwise met the requirements of the section, there was no evidence as to when it was ascertained. As we have said, the section has in mind that the ascertainment of the loss will be an event separate from the knowledge of the person or persons alleged to have misappropriated the taxpayer's funds. On 30 June 1980, all persons who had any knowledge of the alleged misappropriation were the same persons who, in one way or another, formed a part of the scheme to effect that misappropriation. Nothing happened in the relevant year of income which could be called an ascertainment of loss.

27. Finally, it is difficult to see that there was evidence before the Tribunal on which the Tribunal could have found that there was a misappropriation of moneys that were to be, or had been, included in the assessable income of Burgess Veneer. The section requires that there be a tracing of moneys so that what has been misappropriated can be identified with that which has been or is included in the assessable income. There is no deduction for all losses arising from misappropriation.

28. If income, when received, has been used to pay off the taxpayer's debts and so has left the taxpayer's hands, there can be no misappropriation of or in respect of that money. The benefit arising from the reduction in the liabilities of the taxpayer cannot be the subject of a relevant misappropriation. Likewise, income which has been or is to be included in the assessable income of a taxpayer, but has been dealt with in such a way that it has become mingled generally in the finances of the taxpayer and can no longer be traced or identified as income of that description cannot be the subject of a s.71 deduction. The section requires that the misappropriation be of or in respect of money that is or has been included in assessable income. That criterion must be established on the facts of the case. It should perhaps be added that the criterion may be established (as is demonstrated by the words "or has been") although the loss has occurred after the derivation of the income, provided the identity of the money lost as assessable income has not been obliterated.

29. The case, as presented to the Tribunal, was simply that, as the misappropriation was a misappropriation of the whole of the then assets of the company, it must have comprehended a misappropriation of the income that had been derived and was included in the assessable income of the company to be assessed for the year ended 30 June 1980. But how could that conclusion be drawn? It was likely that the sum that was on hand between 9:30 and 10:30 am on 30 June 1980 could be traced, in whole or in the main, to the sale price of assets which had been held by the company for many years. It is true that the balance sheet contained an item of $1,948,268 in respect of Unappropriated Profits. However this was a mere book entry, and did not assist the tracing of any income that had been or was to be included in assessable income, into assets that may have been misappropriated. "Unappropriated Profits" cannot be misappropriated.

30. In brief, there was before the Tribunal no evidence from any witness which traced the funds alleged to have been misappropriated back to income that had been derived by Burgess Veneer and had been or was to be included in its assessable income. There was not even a statement of the source and application of funds, in accordance with Australian Accounting Standard 12, or any like calculation which may have assisted the Tribunal to identify the moneys misappropriated with moneys that had been or were to be included in assessable income.

31. On this point, the applicant ought to have failed by reason of the principle that it is for the applicant to show not only that it was entitled to a deduction but also the quantum of the deduction to which it was entitled. See s.190(b) of the Act, Trautwein v. Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63 at 88 and Donaldson v. Federal Commissioner of Taxation (1974) 74 ATC 4192 at 4212.

32. The Tribunal came to the conclusion that the requirements of s.71 were not satisfied, but did so by a different path. The Tribunal based much of its reasoning upon the terms of s.67 of the Companies Act 1961 which read, inter alia:-

"67. (1) Except as is otherwise expressly provided by
this Act no company shall give whether directly or
indirectly and whether by means of a loan guarantee or
the provision of security or otherwise, any financial
assistance for the purpose of or in connexion with a
purchase or subscription made or to be made by any
person of or for any shares in the company or, where the
company is a subsidiary, in its holding company or
(except in the case of borrowing shares of a building
society) in any way purchase deal in or lend money on
its own shares.

...

(3) If there is any contravention of this section,
the company and every officer of the company who is in
default shall be guilty of an offence against this Act.
Penalty: Imprisonment for three months or one thousand
dollars."

The Tribunal said, in para. 33:-

"Let it be supposed that this Tribunal finds, on the
evidence before it, that there was on 30 June 1980, in
respect of B Pty Ltd, a contravention of Section 67 of
the Companies Act 1961 as it then stood. That would
indicate the probability that there was evidence on
which a court of competent jurisdiction could decide
that, by virtue of the provisions of sub-section 67(3),
the company was guilty of an offence against that Act.
Such a finding of fact is fundamental to the submission
of the applicant, and for present purposes it will be
assumed that it is justified by the evidence." (The
emphasis is mine.)

33. Section 67 of the Companies Act 1961 was not in fact fundamental to the case put to the Tribunal on behalf of the applicant. Section 67 was merely one of many offences that the action of stripping Burgess Veneer of its assets may have given rise to. Written submissions which were put to the Tribunal on behalf of the applicant after the hearing, specifically stated that a finding that an offence was committed under s.67 was not necessary to the allowance of a deduction under s.71. The issue as to s.67 of the Companies Act 1961 appears to have arisen because the applicant argued, we think unnecessarily, that the payment by Burgess Veneer of $4,067,311 to Khumba Pty Ltd could not have been a loan from Burgess Veneer to Khumba Pty Ltd because Khumba Pty Ltd intended to pass on the money to Taxation Advisers Pty Ltd and Taxation Advisers proposed to use most of the moneys to pay the applicant for the shares in Burgess Veneer. The submission was put that Burgess Veneer could not have made such a loan, for it would have breached s.67 of the Companies Act, and that the transfer of funds had been a misappropriation by Messrs Coghill and Edwards. Perhaps s.67 was also relied upon before the Tribunal to suggest that the moneys paid out by Burgess Veneer had been paid out for an illegal purpose and could not be recovered by Burgess Veneer. In any event, the Tribunal seems to have given more importance to the point than was intended by the applicant.

34. The Tribunal held that, if there had been a contravention of s.67 of the Companies Act, Burgess Veneer, as well as its directors, was responsible and, therefore, that the loss flowed from the actions of the company itself. In paragraph 38, the Tribunal said:-

"Thus, assuming as I have said, that there was a
contravention of Section 67 of the Companies Act 1961
and that accordingly B Pty Ltd was guilty of an offence
against that Act; and assuming further that, as Mr Myers
submits, the contravention created the loss said to have
been incurred by that company on 30 June 1980: then the
creation of the loss derives not from the actions of the
directors alone, but also from the actions of the
company itself. If that is so, the loss cannot, in my
opinion, be found to have been, in terms of Section 71
of the Assessment Act 'incurred by the taxpayer through
... defalcation or misappropriation by a person,
including an agent employed by the taxpayer'. The loss
was an act, not solely of the directors or of any other
person but of the taxpayer."

35. For the reasons we have given above, we think that this conclusion was correct; but it was not well based upon the discussion of s.67 of the Companies Act contained in previous paragraphs of the Tribunal's reasons. For example, in paragraph 35, the Tribunal had said:-

"However, in my view, Parliament, in creating, by the
enactment of sub-section 67(3) of the Companies Act
1961, an offence expressly capable of being committed by
a company, must thereby be taken to have either
recognised the validity of, or impliedly validated, the
relevant actions of a company engaging in the conduct
constituting the offence."

This was not, in our view, a factor which was relevant to the interpretation of s.71 or to the application of that section to the facts of the case.

36. The Tribunal correctly went on to emphasise that the payment was a payment by Burgess Veneer. In paragraphs 39 and 43, the Tribunal emphasised that Messrs Coghill and Edwards "... represent the directing mind and will of the company and control what it does ...".

37. However, the Tribunal then referred to Ash v. Federal Commissioner of Taxation [1938] HCA 68; (1939) 61 CLR 263 and reasoned that, as the subject transactions were actions of the company itself, carried out by directors who, at the time, controlled not only the company but also its sole beneficial shareholder, the transactions contravened the principles of deductibility enunciated in Ash's case. In that case, at p.274, Latham C.J. had said:-

"But the case is different when income is actually
received and then misapplied by the proprietor of a
business or a person in the position of such a
proprietor, as, for example, the manager of a company."

At 281, Dixon J. had said:-

"If a proprietor of a business converts its funds to his
own use or uses the opportunities the business affords
to defraud its clients or customers, his resulting
liability cannot be considered an outgoing of the
business, still less an outgoing on revenue account".

38. Ash's case concerned a deduction under s.23 of the Income Tax Assessment Act 1922 (Cth), a predecessor to s.51 of the Act. Section 71, which is one of the original sections of the Act as enacted in 1936, was not enacted to deal with the situation which arose in Ash's case. In Ash's case the judgment was not given until 1938 and the moneys which had been the subject of defalcation were clients' funds, not income which had been included in the taxpayer's assessable income. Moreover, the defalcation had been made by a partner in the business, not by a person employed in the business. It cannot be said that s.71 was introduced either in response to the factual situation which was to be considered in Ash's case or in response to the reasons delivered by their Honours. In these circumstances, and as s.51 of the Act, like its predecessor s.23 of the 1922 Act, relies upon quite different principles, it is not useful to argue by analogy from what was said in Ash's case.

39. Nevertheless, the ultimate conclusion of law at which the Tribunal arrived was that the alleged misappropriation was a misappropriation by the directors, who represented the directing mind and will of Burgess Veneer and controlled what it did, and who represented and controlled not only the company itself but also its sole beneficial shareholder, and that their acts did not give rise to a deduction under s.71 of the Act. For the reasons we have earlier given, this conclusion of law was correct. In the circumstances, the Tribunal did not make an error of law which vitiated its decision.

40. The Tribunal also held that principles of public policy would preclude the allowance of the deduction in the present circumstances. In the appeals, Mr Shaw submitted that, as a matter of public policy, a deduction ought not to be allowed in the present circumstances, and that s.71 ought to be interpreted in a way which would preclude the allowance of the deduction in these circumstances. However, s.71 should be interpreted having regard to what it says, not in accordance with alleged principles of public policy. The policy of the Parliament has been expressed in the words that have been used. While there may be room for the application of general principles of public policy in the application of a general section such as s.51 of the Act, general principles of public policy must give way to the specific policy enunciated by s.71 of the Act.

41. Moreover, public policy is an inexact guide. If public policy is to be relied upon for the disallowance of a deduction, it should be considered only when it has been determined that the deduction is otherwise allowable. In the present case, we think it was an irrelevant consideration.

42. For the reasons we have given, nevertheless, we are of the view that the decision of the Tribunal was not vitiated by any error of law and that the appeals should be dismissed with costs.