Re Angelo Pezzano (Debtor) Ex Parte: Deputy Commissioner of Taxation (Petitioner) [1989] FCA 53 (10 March 1989)

FEDERAL COURT OF AUSTRALIA

Re: ANGELO PEZZANO (Debtor)
Ex parte: DEPUTY COMMISSIONER OF TAXATION (Petitioner)
No. P2718 of 1987
FED No. 76
Bankruptcy - Income Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
Beaumont J.(1)

CATCHWORDS

Bankruptcy - power of a court of bankruptcy to go behind default judgment recovered in District Court in respect of assessments of income tax.

Income Tax - assessments purportedly made under s.l67 Income Tax Assessment Act 1936 - whether made conclusive by s.177(1) of that Act - whether assessments invalid as colourable or an abuse of power.

R v. Commissioner of Taxation (WA); Ex parte Briggs (1986) 12 FCR 301.

R v. Deputy Commissioner of Taxation (WA); Ex parte Briggs (1987) 14 FCR 249.

Wren v. Mahony [1972] HCA 5; (1972) 126 CLR 212.

HEARING

SYDNEY
10:3:1989

Counsel and Solicitors Mr. B. Pape instructed by
for Debtor: Benjamin and Khoury

Counsel and Solicitors Mr. A.H. Slater with

for Petitioner: Mr. R. Lumley, instructed by

Australian Government
Solicitor's Office

ORDER

The petition is stood over to a date to be fixed before the Registrar for the purpose of making a sequestration order.

Costs reserved.

Note: Settlement and entry of orders is dealt with in rule 124 of the Bankruptcy Rules.

DECISION

The Deputy Commissioner of Taxation ("the petitioner") petitions the Court for a sequestration order against the estate of Angelo Pezzano ("the debtor") on the grounds that the petitioner recovered a final judgment against the debtor in the District Court on l4 February 1986 in the sum of $l7,875.84 for income tax and additional tax for late payment and interest (see para.2 of the petition) and that the debtor subsequently failed to comply with the requirements of a bankruptcy notice issued in respect of the judgment.

2. The debtor has stated his opposition to the petition on the following grounds:

"1. As to paragraph 2 of the Creditor's Petition, the
debtor denies that he is indebted to the
petitioner in respect of the final judgment of
$17,875.84.
2. The Judgment Debt was founded upon invalid
amended assessments of income tax for the years
ended 30 June, 1981, 30 June, 1982 and 30 June,
1984.
3. The amended assessments referred to in paragraph
2 should be quashed as the Commissioner of
Taxation failed to make a bona fide assessment in
each of the relevant years.
4. The taxable income purportedly ascertained by the
Commissioner of Taxation in each of the relevant
years was a guess.
5. In purportedly ascertaining the taxable income
for the relevant years, the Commissioner of
Taxation failed to properly make a judgment
within the meaning of s.167 of the Income Tax
Assessment Act 1936."

3. The primary facts are not in dispute. The debtor returned taxable income in the years ended 30 June 1981 to 1984 inclusive as follows:

Taxable Income
1981 $7,977
1982 $7,163
1983 $10,468
1984 $9,950

4. The petitioner made assessments in accordance with these returns. On 1 May 1985, the petitioner purported to make amended assessments in respect of the years 1981 to 1984 inclusive. Under these assessments, the petitioner increased the debtor's taxable income as follows:

1981 $10,000
1982 $6,000
1983 $10,280
1984 $10,000

5. Served with the amended assessments was an "adjustment sheet" as follows:

"Year Ended
30 June 81 82 83 84
TAXABLE INCOME AS
ASSESSED OR RETURNED 7977 7163 10468 9950
ADD:
As a result of a field
audit of your income
tax affairs the
following adjustment
has been made:
Undisclosed income now
included in net income 10000 6000 10280 10000"

6. On 13 June 1985, the debtor objected to the amended assessments. By letter dated 12 July 1985, the petitioner disallowed the objection. However, the debtor did not seek to have his objections referred to the Board of Review for decision. On 5 December 1985, the petitioner sued the debtor in the District Court on the four amended assessments. As has been said, judgment by default was recovered on 14 February 1986.

7. The evidence with respect to the decision-making process in making the assessments now challenged consists of two sets of documents. The first consists of an audit report showing as a "result" understatements of income in line with the amended assessments. Reference is made to a "Supplementary Report" dated 4 April 1985 which is as follows:

"Reason for Audit.
T/P was routinely selected for a field audit.
Background.
T/P has been carrying on a business of general handyman
(e.g. gardening, concreting, fence repair) and working
in a pizza place. T/P stated all receipts of cash were
banked immediately and cash needed for materials was
withdrawn. This was not demonstrated from his bank
statements.
Records.
T/P held no records or receipts and relied soley on
bank bks. (Savings a/c)
Scope of Audit.
The audit was carried out on a T-A/c basis on the
1981-84 financial years with the T-A/c being prepared
on the 83 yr.
General Observations.
T/P lives in a large two storey house in Kingswood. It
is a new house but sparsely furnished. T/P states they
are poor and this is why they don't have the house
fully furnished. However, on 30/6/84 T/P had $26000 in
the bank and since then he has sold a block of land
purchase price $40000 in 1980 for $84000. T/P's
lifestyle is a matter of choice rather than necessity.
T/P estimated their cost of living as between $4000 to
$5000.
Factors Pertaining to Additional Tax
T/P at all times was co-operative although a number of
his answers were proven to be incorrect. T/P stated
that he had not properly understood the questions when
these irregularities were put to him.
T/P maintains no books & appears to have kept the full
amount of many payments at home to pay various
expenses. The omission of income appears to be the
result of a lack of bookkeeping and a desire for
money."

8. The following additional comments, apparently made by another officer, then appear:

"The T a/c for 1983 revealed a shortage of $10280. The
other years have been adjusted based on negotiated
figures representing taxable incomes. The fact that
the tpr was overeseas for 6 mths was taken into account
in determining the 1982 amended taxable income."

9. It is now common ground that although the debtor was interviewed by officers of the Australian Taxation Office, the debtor did not "negotiate" any figure as was suggested in these comments. It appears, therefore, that the officer making the comments was mistaken in this regard. However, there is no suggestion of bad faith here. The parties have proceeded on the basis that the mistake was an honest one. The debtor's real complaint is that it was not open to the petitioner to apply the 1983 figures to the other years.

10. The second document is an objection report dated 4 July 1985 as follows:

"GROUNDS OF OBJECTIONS - FOLIO 28-29. The taxpayer has
objected against the inclusion of additional income for
each year on the ground that no additional income was
derived by him. During the year ended 30.6.82 he
states he received capital receipts totalling $10000.
REMARKS
A 'T a/c' was prepared for the taxpayer in respect of
the year ended 30.6.83, which established a shortage of
funds available to the extent of $10,280. This
understatement was then applied to the 81 82 & 84 years
on the following basis:-
- Taxable incomes were brought into line with the
adjusted figure for 1983.
- Adjustments were rounded off.
- Allowance was made for 1982 in view of the
taxpayers absence overseas.
Prior to objection the taxpayer met with the auditor
Mr. THURLBY on 3 occasions on the premise of being able
to explain the shortage and provide the necessary
evidence to support his claims. The taxpayer changed
his story on each occasion and his 'supporting
evidence' proves very little.
The objection letter is basically a re-hash of these
meetings and sheds no light on the matter.
It is therefore submitted to disallow all objections."

11. The debtor now accepts that the amended assessment in respect of the year ended 30 June 1983 was properly made. But, as has been said, he submits that it was not open to the petitioner to amend the assessments for the 1981, 1982 and 1984 years merely by reference to the income understated for the 1983 year. The debtor argues that the 1981, 1982 and 1984 assessments were therefore made arbitrarily and without any rational foundation with the result that they should be treated as invalid or as null and void in the sense explained in R v. Commissioner of Taxation (W.A); Ex parte Briggs (1986) 12 FCR 301.

12. In Brigg's Case, the parties agreed upon certain facts only for the purposes of the stated case. As the subsequent trial was to show, the facts agreed for the purposes of argument in the Full Court did not reflect the true position (see (1987) 14 FCR 249). The facts which the parties asked the Full Court to assume included the following extraordinary assertions (at p 303):

"4. None of the Respondents, prior to the issue and
service of the Notices of Amended Assessment and
Assessment, made any attempt to ascertain the
Prosecutor's taxable income, nor intended to
undertake any relevant process of calculation but
the First Respondent issued the said Notices for
the purpose of forcing the Prosecutor to consult
with him or his officers.
5. None of the Respondents carried out any or any
proper investigation of the affairs of the
Prosecutor prior to the making of the Amended
Assessments and Assessments the subject of the
Notices.
6. There was no material having any rational or
logical probative force to justify the issue of
the Notices of Amended Assessment and Assessment.
7. None of the Respondents took any steps to
consider facts provided by the Prosecutor to the
Respondents prior to the issue of the Assessments
and Amended Assessments.
8. The Respondents failed to consult with the
Prosecutor prior to the issue of the Notices of
Assessment and Amended Assessment.
9. The First Respondent in the person of the Second
Respondent decided to issue the Notices of
Amended Assessment and Assessment knowing that
they did not reflect any rational assessment of a
liability of the Prosecutor or with reckless
indifference to whether they did or did not
reflect any such assessment."

13. The Full Court was of the view that such an abuse of statutory power could vitiate the purported "assessments". The Court said (at p 308):

"The respondents have thus elected to proceed upon a
footing different from that contemplated by the Act,
for the statute proceeds upon the hypothesis that the
Commissioner will not be motivated in the exercise of
his powers by improper or collateral purposes: see
Bloemen, per Mason and Wilson JJ at 375. But, to adapt
the language of Isaacs J. in Clarke, the present case
does not involve a 'curial diving' into 'confidential
channels of information'. Rather it is a case, no
doubt unusual, of the respondents' asserting that they
have abused their powers. This assertion, it is true,
is made in a statement of facts which is agreed on a
limited basis only. Nonetheless, we must accept the
assertion as accurate.
A genuine attempt to ascertain the taxable income of a
taxpayer, even if carried out cursorily or imperfectly,
is one thing. But when regard is had to the whole of
the facts and surrounding circumstances of the present
case and it appears that the respondents never intended
to embark and did not in fact embark, upon the process
of ascertaining the taxpayer's income, no 'assessment'
is involved. So much is really conceded by the
respondents in the agreed facts and that consideration
takes the case beyond what was decided in Bloemen. It
must follow that s 177(1) can have no operation."

14. Assuming in favour of the debtor that it is permissible for this Court to go behind the District Court judgment (see Wren v. Mahony [1972] HCA 5; (1972) 126 CLR 212), there is no basis, in my view, for the assertion that any of the amended assessments should be treated as a nullity.

15. It may be accepted that a colourable assessment or an assessment made with an improper purpose in view would be regarded as an abuse of power and, as in the case of any act of bad faith in public administration, would be declared invalid by a court in the exercise of the ordinary power of judicial review. But the debtor does not, and could not, suggest bad faith here. Rather what is put on his behalf is that the process of reasoning employed by the petitioner was unreasonable in the sense that it lacked a rational foundation, with the consequence, it said, that the amended assessments were invalid.

16. I cannot accept this analysis. The question here is not whether the amended assessments were reasonably made or lacked rational foundation. The issue is whether they were, in truth, assessments at all. If they purported to be assessments but were vitiated for abuse of power or bad faith, this Court could go behind them. But where, as here, the real debtor's attack concentrates upon the merit, or lack of merit, of the decision-making process, this Court lacks jurisdiction to interfere. Section l77(1) of the Income Tax Assessment Act 1936 makes an the assessment issued in good faith conclusive unless it is set aside in accordance with the appellate procedures laid down in Part V of the Act. In my opinion, the assessments now challenged must be treated as valid in the absence of any allegation of bad faith.

17. In the result, the opposition to the petition fails.

18. I propose to stand the petition over to a date to be fixed before the Registrar for the purpose of making a sequestration order.