Producers' Co-operative Distributing Society Ltd v Commissioner of Taxation (NSW) [1944] HCA 39; (1944) 69 CLR 523 (11 December 1944)

The Producers' Co-Operative Distributing Society Limited Appellant; and The Commissioner of Taxation (N.S.W.) Respondent.

This is an appeal from an order of the Full Court of the Supreme Court of New South Wales (Davidson and Halse Rogers JJ., Jordan C.J. dissenting) dismissing an appeal from a decision of an Income Tax Board of Appeal by which it was decided that the appellant company, which is registered as a rural society under the Co-operation Act 1923-1941 N.S.W., is not entitled to exemption from income tax under the Income Tax Management Act 1941 N.S.W., s. 19 (o). This latter provision is in the following terms:—"The following income shall be exempt from income tax:—... (o) the income of a co-operative building society, and the income of a rural society registered as such under the Co-operation Act, 1923-1941, as amended by subsequent Acts, if the principal business of that rural society is the manufacture, treatment or disposal of the agricultural products (as defined in that Act) or livestock of its members".

The appellant company is a rural society registered as such under the Co-operation Act 1923-1941. Section 45 of that Act provides that a certificate of registration under the Act shall be conclusive evidence that all the requirements of the Act in respect of registration have been complied with. A certificate of registration under the Act has been issued to the society.

The business of the society is the sale on commission of butter, bacon, cheese, honey, eggs, poultry, fruit and vegetables and similar commodities. Its members consist of a large number of individual farmers, but also of nearly one hundred co-operative societies which are also registered under the Act. Its principal business consists in selling on commission butter manufactured by those co-operative societies. The society does not manufacture or treat the butter in any way, but it disposes of the butter belonging to the co-operative societies which employ it. It is argued, therefore, for the company that its principal business consists in the disposal of an agricultural product (as defined in the Co-operation Act) of its members, namely, butter. The questions which have been argued upon the appeal are, first, whether this butter is an "agricultural product" as defined in the Co-operation Act and, secondly, if so, whether it is an agricultural product "of the members" of the society. The argument upon the latter point has been directed to the question whether "of its members" means "belonging to its members" or "produced by its members."

The Co-operation Act 1923-1941, s. 5, defines "agricultural products" as meaning "products of any rural industry." The same section defines "rural industry" as meaning "the cultivation or use of land for any agricultural, pastoral, dairying, or rural purpose." It is argued for the appellant that butter is essentially a product of the use of land for dairying purposes. In an ordinary use of language milk, cream, butter and cheese are all dairy produce. The dictionaries define "dairy" as including a place where butter and cheese are made. But a rural industry as defined involves the cultivation or use of land for dairying or other rural purposes. If a farmer grazes cows, produces milk and makes butter, there is, I should think, no doubt that he is engaged in a rural industry within the meaning of the Act, because he is plainly using land for a dairying purpose. The evidence, however, shows that to-day the making of butter has become a factory process, separated from the farm. Formerly the farmer made butter on the farm, but now the farmer milks his cows, separates the cream and disposes of the cream to a butter factory, either co-operative or proprietary. In the present case the cream which becomes the butter which the appellant company sells is sold to co-operative societies which conduct factories. Those factories manufacture the cream into butter. It cannot be said that the factories cultivate or use land for a dairying purpose, because they do not cultivate or use any land for that purpose. The butter which a factory produces is not the product of the land which the factory occupies. The factory is not, in my opinion, engaged in a rural industry within the meaning of s. 5 of the Co-operation Act. If this be so, the butter made by the factory is not "a product of any rural industry" and therefore it is not an agricultural product as defined in s. 5.

The co-operative society which conducts the butter factory enjoys the advantage of the exemption granted by s. 19 (o) of the Income Tax Management Act, not because it "disposes" of an agricultural product of its members (the society does not dispose of the cream produced by the farmers) but because it manufactures or treats an agricultural product, namely, cream, of its members, whether the phrase "of its members" is construed as meaning "belonging to" or "produced by" its members. But the exemption does not, in my opinion, carry on to another company, such as the appellant, which manufactures and treats nothing, and which (in its relevant operations) only disposes of a product manufactured by another co-operative society out of the original agricultural product.

Section 19 (o) limits the exemption to cases where the principal business of a rural society is the manufacture, treatment or disposal of the agricultural products as defined in the Co-operation Act or livestock of its members. In my opinion under this provision it is proper to look at the Co-operation Act only so far as that Act defines that term. The words "agricultural products" in the Income Tax Management Act are to be replaced by the definition derived from the Co-operation Act. The definition of in the Co-operation Act is "products of any rural industry." It is proper therefore to consider also the definition of rural industry—as I have done above. But in my opinion there should be no further investigation of the Co-operation Act for the purpose of determining the meaning of "agricultural products." It is only the definition of that term (ascertained in the manner stated) and not other provisions of the Co-operation Act, which is transferred to the later Act, and references in such other provisions to the term defined should not, in my opinion, be considered for the purpose of interpreting that term in the later Act: See In re Wood's Estate; Ex parte Her Majesty's Commissioners of Works and Buildings[1].

It has been held that where a section of one Act is incorporated in another Act, reference may be made to other sections of the earlier Act for the purpose of interpreting the section so incorporated (Portsmouth Corporation v. Smith[2]). Whether or not this principle can be reconciled with that stated in Wood's Case[3], it appears to me that the incorporation of a definition of a particular term stands upon a different footing from the incorporation of a section of an Act. The meaning of a section may be ascertainable only by a consideration of other sections with which it is associated. But it would be an inversion of ordinary methods of approach to seek to interpret a definition by reference to provisions in which the defined term was used. In the present case the definitions in the Co-operation Act, s. 5, are prefaced by the words, "unless the context or subject-matter otherwise indicates or requires." Context or subject matter may modify in a particular provision the prima facie meaning of a defined term, but cannot modify or affect in any way the definition itself which is introduced into the later Act.

If, however, it were proper to consider, not merely the relevant definitions as set forth in the Co-operation Act, but other provisions in the Act as possibly explaining, extending or limiting those definitions, then the same conclusion would, in my opinion, be reached, namely, that the relevant butter in this case is not an agricultural product. The Co-operation Act distinguishes between agricultural products and the products of a process of manufacture applied to agricultural products. The distinction is perhaps most clear in various provisions of s. 7 of the Act, but particularly in s. 7 (1), pars. (a) and (b). Section 7 (1) provides that "a rural society may be formed for all or any of the following objects:—(a) to dispose of the agricultural products or live stock of its members or other persons; (b) to manufacture or treat the agricultural or live stock products of its members or other persons, and to dispose of the products so manufactured or partly manufactured ..." The concluding words of par. (b) would be unnecessary if the words "dispose of ... agricultural products" contained in par. (a) applied to a disposition of a product manufactured out of agricultural products. If a society takes advantage of the provisions quoted by adopting objects corresponding to pars. (a) and (b), then under the power referred to in par. (a) it may dispose of agricultural products, and under par. (b) may manufacture agricultural products into something else and dispose of the resulting manufactured product. Section 19 (o) applies in favour of a society so far as it either disposes of the agricultural products of its members or manufactures or treats those agricultural products. But the provision does not apply in favour of a society so far as it disposes of products (such as butter) manufactured out of agricultural products (such as cream).

Accordingly whether attention is limited to the relevant definitions in the Co-operation Act, regarded as transferred to s. 19 (o) of the Income Tax Management Act, or whether, on the other hand, other provisions of the Co-operation Act are also taken into account, in my opinion the same conclusion follows, namely, that the butter the sale of which constitutes the principal business of the appellant company is not an agricultural product within the definition of that term contained in the Co-operation Act.

This conclusion renders it unnecessary for me to examine the further question whether the butter is an agricultural product "of the members" of the appellant society, that is, the question whether the phrase "of its members" means "belonging to its members" or in some sense "produced by its members." If I were of opinion that the butter was an agricultural product within the meaning of the definition in the Co-operation Act I should have difficulty in seeing how it could be held that it did not fulfil the description of both belonging to the co-operative factory societies and of being produced by them in the sense of manufactured by them. But if the butter is not (as in my opinion it is not) an agricultural product within the meaning of the Act, the question does not arise. In my opinion the appeal should be dismissed.

The present appeal turns upon a narrow question. It is whether butter is a product of a use of land for a dairying purpose, within the meaning of an Act of Parliament which provides that a rural co-operative society may be formed to dispose of the agricultural products or livestock of its members or other persons, such agricultural products being the products of any use of land for, inter alia, any dairying purpose. It has been contended for the respondent that, although butter is a product of a use of land for a dairying purpose when made by a dairy-farmer on his own land from cream derived from his own cows, it is not so when made by the co-operative butter factory to which he sells his cream. I do not think this distinction to be warranted by the provisions of the Act. It is only Schlaraffenland, the land of Cocaigne, that flows with milk and honey in a literal sense. In the land of reality, these commodities are not products of land or of the use of land, like natural grass or sown crops. They are the products of cows and bees. It is in relation to reality that phraseology such as "products of any use of land for any dairying purpose" must be interpreted. In such a context, "products" evidently means products derived at some remove from land. When this is apparent, it is apparent also that to give effect to the intention of the phraseology in its present context it is necessary to regard "any dairying purpose" as intended to be the dominating phrase. So long as the products are the result of a dairying purpose, the land used for the purpose is a secondary consideration. Any use of land directed to the purpose is sufficient. This being so, I am unable to see why a rural co-operative society, which uses its land to produce butter from cream which it has bought, does not obtain, in its butter, a product of a use of land for a dairying purpose; or why a rural co-operative marketing society, which has as its principal business the disposal of the agricultural products, including the butter, of its members, whether dairy-farmers or co-operative butter factories, should not be regarded as within the provisions of s. 19 (o) of the New South Wales Income Tax Management Act 1941.

The income of a rural society registered under the Co-operation Act 1923-1941 N.S.W. is exempt from income tax under the Income Tax Management Act 1941 N.S.W., s. 19 (o), if the principal business of that rural society is the manufacture, treatment or disposal of the agricultural products (as defined by the Co-operation Act) or the livestock of its members. Unless the context or the subject matter otherwise indicates or requires, the Co-operation Act 1923-1941, s. 5, prescribes that "agricultural products" means products of a rural industry and that "rural industry" means the cultivation or use of land for any agricultural, pastoral, dairying, or rural purpose.

Admittedly the appellant is a rural society registered under the Co-operation Act already mentioned and it is a co-operative society. Its principal business is the disposal of the products of its members and other persons, such as butter, cheese, bacon, honey and other commodities. Its turnover for 1941 approached seven million pounds, of which about sixty per cent comprised sales of butter of its members and the greater proportion of its sales of other commodities also comprised the products of its members. The members of the appellant consisted of co-operative companies and of individuals. Most of the butter received by the appellant for sale and disposal came from the co-operative companies. The practice was for the shareholders of the co-operative companies to send their cream to the companies, which paid them for it, and the companies converted the cream into butter, and sent it to the appellant for sale and disposal.

The appellant claims the benefit of the exemption above set out because its principal business is the disposal of an agricultural product of its members, namely, butter. It should be observed that the exemption is based upon the carrying on of a business involving the manufacture, treatment or disposal of agricultural products, which makes plain that the business is not necessarily in products in their natural state but may be in agricultural products that have been manufactured or treated.

Butter, as it appears to me, is an agricultural product within the meaning of the Income Tax Management Act and the Co-operation Act. Dairying, in the ordinary signification and use of the word, is an industry or occupation concerned with the production of milk, cream, butter and cheese. The Oxford Dictionary, I notice, speaks of dairying as the production of milk, and manufacture of butter and cheese. Therefore the use of land for a dairying purpose includes the production of butter. Accordingly butter is an agricultural product of a rural industry within the meaning of the Acts already mentioned. But is the butter sent to the appellant for disposal the agricultural product of its members? The butter, of course, belongs to its members, that is, the co-operative companies or the persons who forwarded it to the appellant for sale. But the Commissioner—the respondent—suggests that the emphasis should be upon the composite phrase "the agricultural products (as defined by the Co-operation Act) or live stock of its members" in the sense that the products are the result of the labour or exertion of its members. To read it in that sense would not, I think, exclude from the benefits of the Act a rural society which disposed of the livestock of its members who were graziers fattening stock for the purpose of sale, whatever might be the result if the members were dealers in livestock, merely buyers and sellers of livestock. However, the object of the Act is to relieve rural societies. And, in my opinion, the words "of its members" do not relate to the labour or exertions of the members of the society, but must be read in conjunction with the preceding words which are descriptive of the business that the society is doing. Accordingly the exemption applies if the principal business of the rural society is the disposal of agricultural products belonging to its members. The principal business of the appellant was therefore the disposal of butter, an agricultural product belonging to its members.

The appellant is entitled to the exemption claimed and this appeal should be allowed.

This appeal depends upon the application to the facts of the case of the provision exempting from New South Wales State income tax the income of a body registered under the Co-operation Act if its principal business is the manufacture, treatment or disposal of the agricultural products (as defined in that Act) or livestock of its members. The appellant is a body registered as a rural society under the Co-operation Act. It has established that its principal business is the disposal of butter consigned to it for that purpose by other co-operative societies who are members of the appellant society and who manufacture the butter from cream supplied by dairy farmers who are members of the manufacturing societies. The separation of the cream is done by the dairy farmers upon their dairy farms where the milk is produced.

The exemption throws the reader back to the definition of in the Co-operation Act. Recourse to that definition shows that it in turn refers to and depends upon the definition of "rural industry." However, combining these successive references, the material part of the exemption amounts to this:—It exempts from income tax the income of a rural society registered as such under the Co-operation Act, if the principal business of that rural society is the manufacture, treatment or disposal of the products of its members, being products of the cultivation or use of land for any agricultural, pastoral, dairying, or rural purpose or of the livestock of its members.

The question appears to me to be whether the sale by the appellant of the butter manufactured by its members can properly be said to be the disposal of the products of its members, being products of the use of land for a dairying purpose.

In favour of an affirmative answer it is maintained that butter, whether factory-made or churned in a dairy, is by common understanding the product of the use of land for a dairying purpose.

Butter is, of course, ordinarily included in the expressions "dairy produce" and "dairy products" and these are often employed in common speech.

But the words occurring in the definition, namely, "the product of the use of land for a dairying purpose," are descriptive and the description is specially constructed. It is not the mere adoption of a standing or constantly recurring expression. The definition expresses a condition in which "products of the cultivation or use of land" seem to be the dominant words. The description of purpose, agricultural, pastoral, dairying or rural, imposes, of course, a further limiting condition, qualifying the use.

It is correct, I think, that we are to give the definitions of "agricultural products" and of "rural industry" the same meaning as they bear and the same combined operation as they have standing in s. 5 of the Co-operation Act. It is also correct that if in the main provisions of that Act we find a context giving any guidance as to the meaning or application of such a phrase in the definition as "products of the use ... of land" we should refer to it and in interpreting the definition give the context as much effect for the purpose of the income tax exemption as for the purpose of the Co-operation Act.

But, even so, I think that the definition must be read as meaning to exclude from its application commodities in a manufactured form, like cheese and butter, when the manufacturing process is not part of the use of the land for the dairying, or, as the case may be, agricultural, pastoral or rural purpose. The language of the definition naturally bears this meaning.

Whatever may be the exact significance of the word "of" in the expression "of its members" in the exemption it certainly does nothing to weaken the impression produced by the definition in the Co-operation Act. In that Act the object stated in s. 7 (1) (b), though clumsily expressed, seems clearly to describe the manufacture by the rural society of the product of the member, the dairy farmer or agriculturist, into a manufactured product of which the society disposed. Thus if the appellant society manufactured its members' cream into butter of which it disposed, it would come within the provision.

In s. 7 (1) (a) and (b), within which alone the operations exempted seem to fall, the distinction appears to be intended between, on the one hand, the disposal of the products of the soil by the rural society or their manufacture and the disposal of the resultant commodity, and, on the other hand, operations which are more remote and therefore are not considered within the purposes of a rural society.

The co-operative manufacture of dairy produce may be done by a society co-operating with the person who produces, by the use of his land, the raw material of the particular manufacture and then the operation would qualify for the exemption. But it does not, in my opinion, extend to the case of the co-operative disposal of the product of a manufacturing process not itself involving the use of land for a dairying purpose or an agricultural, pastoral or rural purpose.

This is an appeal against an order made by the Supreme Court of New South Wales which by a majority dismissed with costs an appeal by the appellant against a decision of the Board of Appeal constituted under the New South Wales Income Tax Management Act 1941 that the income of the appellant for the year ended 30th September 1941 is not exempt from income tax under the provisions of s. 19 (o) of that Act.

The facts are fully set out in the reasons of their Honours in the Supreme Court and in the reasons of the members of the Board of Appeal and I need not repeat them.

Section 19 (o) provides that "the income of a co-operative building society, and the income of a rural society registered as such under the Co-operation Act, 1923-1941, as amended by subsequent Acts, if the principal business of that rural society is the manufacture, treatment or disposal of the agricultural products (as defined in that Act) or livestock of its members" shall be exempt from income tax.

The evidence establishes that the principal business of the appellant, which is a rural society within the meaning of the Co-operation Act, in the year of income was the disposal of butter belonging to some of its members. These members were about one hundred co-operative butter factories. There were three operations with respect to the butter disposed of by the appellant; (1) the milking of the cows and separation of the cream and its delivery to the co-operative butter factories by the dairy farmers; (2) the manufacture of that cream into butter and its delivery to the appellant by the co-operative butter factories; and (3) the sale of the butter on behalf of the co-operative butter factories by the appellant.

I feel no doubt that in ordinary parlance butter is an agricultural product, but the question is what is included in the description of agricultural products (as defined by the Co-operation Act) of the members of the appellant. The Co-operation Act, s. 5, defines "agricultural products" to mean the products of any rural industry, and "rural industry" to mean the cultivation or use of land for any agricultural, pastoral, dairying, or rural purpose. An agricultural product of the dairying industry within the meaning of the Co-operation Act is, therefore, something produced in that industry by the cultivation or use of land for that purpose. The only persons, therefore, who are owners of agricultural products within the meaning of that Act are those who are cultivating or using land for their production; or, in other words, in the case of dairying, the dairy farmers themselves, so that the co-operative butter factories which are members of the appellant are not members on whose behalf the appellant during the year of income was disposing of agricultural products as defined by the Co-operation Act.

Solicitor for the respondent, A. H. O'Connor, Crown Solicitor for New South Wales.

[1] (1886) 31 Ch. D. 607, at p. 615.

[2] (1885) 10 App. Cas. 364, at p. 371.

[3] (1886) 31 Ch. D. 607.

High Court of Australia

Producers' Co-operative Distributing Society Ltd v Commissioner of Taxation (NSW) [1944] HCA 39; (1944) 69 CLR 523 (11 December 1944)

HIGH COURT OF AUSTRALIA