Forwood Down & Co Ltd v Commissioner of Taxation (WA) [1935] HCA 59; (1935) 53 CLR 403 (26 August 1935)

Forwood Down and Company Limited Appellant; and The Commissioner of Taxation (Western Australia) Respondent.

I think that the conclusion arrived at by Dwyer J. is entirely supported by the facts. His Honor did not, I think, accept the evidence that the property was not intended to be resold but that it was acquired and intended to be retained as a capital asset. In the course of his judgment his Honor said:—"But in view of the company's letter of 28th June 1923 I think the company's present statement of its intention is mistaken and that there was throughout a purpose to resell the mine if that could be effected. Some of the machinery was disposed of during succeeding years, but a substantial quantity was retained. I gather from the company's communication that the portion disposed of was regarded as surplus plant and the residue kept was sufficient to work the mine." I would add that the company did not intend to work the mine itself. I consider that the facts warrant the conclusion that the sale in question resulted in a profit arising from carrying on the business of the company.

It appears to me that the mining lease and machinery on it were acquired by the appellant in the ordinary course of business as machinery merchants; it was disposed of at a date distant from the time of purchase but it was disposed of in the ordinary way of business. The realization of the mining lease and machinery was not a mere change of investment but acts done in carrying on or carrying out the business operations of the appellant. Some little difficulty might have occurred as to the profit made on the transaction but for the fact that the parties in the Court below treated the sum assessed as a profit made on the sale of the mining lease. I see no reason why we should doubt the accuracy of the parties' assessment of the profit.

The decision in W. Thomas & Co. v. Commissioner of Taxation (W.A.)[1] restricts the application of the expression occurring in sec. 6 of the Dividend Duties Act 1902-1931, "all profits made by such company," to profits arising from the trading or business operations of the company and excludes profits such as increments arising from the appreciation in the value or the realization of capital assets of the company.

The question in the present case is whether the value of shares in a mining company acquired by the taxpayer company in consideration of the transfer of some mining leases and plant answers the description profits arising from the trading or business operations of the company. The taxpayer company conducts a business of general and structural steel engineers and manufacturers and dealers in machinery. In the course of this business, the company bought mining machinery as it stood on the mines, where it had been in use. In the case of mines that had closed down, it found it convenient to purchase at the same time the mining lease. It could then leave the machinery in situ until a favourable opportunity occurred of disposing of it. After the removal of the machinery, the taxpayer company would ordinarily surrender or abandon the lease. But, in 1923, in conjunction with one Ridgway, it acquired a mining lease which in the event was disposed of in a different manner. Probably the purpose which the taxpayer company had in view was substantially the same. But it began by attempting to resell the whole undertaking as an entirety. Then it let a tribute in respect of the sands. Some machinery was removed, but the inference is open, or, at least, not negatived, that the balance sufficed for the proper working of the mine. Dwyer J. has found that throughout there was a purpose of reselling the mine.

On an appeal under sec. 30 of the Dividend Duties Act 1902-1931 I think the burden of proof is on the taxpayer, and this view of the company's purpose cannot, in my opinion, be considered disproved by the evidence. But, in any case, on the view of the company it acquired the lease in the ordinary course of its business as a necessary accompaniment of the machinery. It did not acquire it as premises it intended to occupy indefinitely. The lease was paid for by expenditure chargeable against revenue. It was, on the company's contention, a valueless concomitant of the machinery it bought, to be held only until the machinery was disposed of and removed. On removal it would be abandoned, if it was not resold; not worked as a fixed asset in the undertaking. There never was any use on the part of the taxpayer company of the mine or the plant thereon, and, I think, never any intention to use it. It did not represent fixed capital devoted to the production of profit by means of operation or use. The transaction by which it was disposed of was not, it is true, ordinarily within the scope of the company's trading operations. It is suggested that the shares received as consideration for the sale cannot be regarded as more than a change in the form of the company's legal and commercial title to the property; that the transaction by which the lease and machinery was transferred for shares was not part of the conduct of the trade or business of the taxpayer (see Doughty v. Commissioner of Taxes[2]). But, both in the statement of facts and in the profit and loss account, a definite value is assigned to them. No proof was led upon the manner in which this value was arrived at. For all that appears, the shares may have possessed a value on the market which made them the equivalent of so much money. They may have been immediately convertible.

On the whole of the somewhat meagre facts, I do not think the taxpayer company has shown that the profit appearing in its accounts is not an actual profit from the trading and business operations of the company.

When analyzed, the case for the company rests mainly upon the supposed antithesis, in describing its purpose in acquiring the mining lease, between the purpose of storing machinery on the lease and the purpose of reselling the lease. The antithesis is a false one because, in point of fact, the company acquired the lease for both purposes, not only that of storing machinery pending the sale of the latter, but also that of reselling the lease when a place of storage was no longer required. In all the circumstances, the transaction of buying and selling the lease was sufficiently related to the company's business to bring the profit into tax in accordance with the principles enunciated in W. Thomas & Co. v. Commissioner of Taxation (W.A.)[3].

I agree that Dwyer J. arrived at a correct conclusion in finding that the appellant joined with Ridgway in an ordinary profit-making venture in the way of its business, and that the venture was to buy the Lancefield mine and machinery and to resell at a profit and that these objects were carried out.

It follows that the learned Judge was correct in holding that the amount in question should be regarded as profits taxable under the Dividend Duties Act (see Thomas's Case[4]).

Solicitor for the respondent, J. L. Walker K.C., Crown Solicitor for Western Australia.

[1] [1931] HCA 11; (1931) 45 C.L.R. 539.

[2] (1927) A.C., at p. 336.

[3] [1931] HCA 11; (1931) 45 C.L.R. 539.

[4] [1931] HCA 11; (1931) 45 C.L.R. 539.

High Court of Australia

Forwood Down & Co Ltd v Commissioner of Taxation (WA) [1935] HCA 59; (1935) 53 CLR 403 (26 August 1935)

HIGH COURT OF AUSTRALIA