Australian Machinery & Investment Co Ltd v Deputy Federal Commissioner of Taxation (1946) 180 CLR 9 [1946] HCA 65; [1946] ALR (CN) 572b; (1946) 20 ALJR 234 (7 June 1946)

The following written judgments were delivered:

LATHAM CJ The Australian Machinery & Investment Co Ltd is a company which was incorporated in Victoria in 1924 and is a "resident" within the meaning of that term as defined in par (b) of

the definition of "resident" contained in the Income Tax Assessment Act 1936 (Cth), s 6. The assessable income of the company therefore includes the gross income derived directly or indirectly from all sources whether in or out of Australia s 25(1)(a). Section 23(q) of the Act provides that the following income shall be exempt from income tax "income derived by a resident from sources out of Australia, where that income is not exempt from income tax in the country where it is derived". The company contends that certain income which was derived in the year ending 31 October 1936 from the sale in England of shares in other companies was income derived from a source out of Australia and that that income was not exempt from income tax in England. If the company establishes this position it is not subject to Australian income tax in respect of the income so derived from English sources.

The Commissioner refused to allow any exemption under s 23(q), the company objected to the assessment, the relevant objections were disallowed, and upon appeal to this court Rich J held that the income which was the principal subject of controversy was derived partly from sources in Australia and partly from sources out of Australia, and that it should be apportioned between the sources. He ordered that the assessment be set aside and that the matter be remitted to the Commissioner to be dealt with under the Act for re-assessment of the company. The company has appealed from certain of the declarations made by his Honour and the Commissioner has cross-appealed as to certain other parts of the order made.

The taxpayer company (which I will refer to as "the company") purchased mining leases etc, particularly in Western Australia. Mr C A de Bernales had large powers of control over the company under the articles of association. One of the objects of the company was to dispose of its mining interests in exchange for shares in other companies. Twenty-seven companies were formed in Western Australia and in each case Mr de Bernales had wide powers of control under the articles of association. By resolutions passed by each of these companies he was given authority as attorney under power of the company to dispose of the assets of the company in exchange for cash or shares, debentures or securities of any other company.

The company transferred mining interests to the twenty-seven Western Australian companies and received as consideration for the transfer over three million shares in those companies. Before proceeding to deal with these shares the company acquired the total number of shares issued by those companies. Thus the company was

in possession of a very large number of shares in the Western Australian companies and Mr de Bernales had power, under a power of attorney from the company, to dispose of those shares "at such consideration to be satisfied in such manner as the said attorney shall think fit".

Mr de Bernales went to England in 1932. During a period up to 1935, acting under the powers mentioned, he disposed of shares in the Western Australian companies among seven English companies which were formed in the years 1933-1935. The consideration for the transfer of shares by the company to the English companies consisted of cash amounting in all through the total period to £481,945, 1,075,000 shares in the English companies valued by the company at par, and options of purchase over 1,267,500 shares in those companies. The amount expended by the company up to 31 October 1936 in acquiring, maintaining and, in some cases, developing the mining properties, and in incorporating the twenty-seven Western Australian companies, amounted to £119,251.1.10.

The company, having become the owner of shares in the English companies, sold large numbers of those shares. The parties agreed that, as a result of these transactions, the company's assets increased in value according to its accounts during the income years 1933, 1934, 1935 and 1936 by £1,643,979.0.7, including a sum of £271,519.17.3 set aside as a reserve for exchange. If the cost of the shares were taken at the abovementioned figure of £119,251, the transactions showed a large profit, which was dealt with by the company in its accounts as "capital appreciation". The shares not sold and other assets were transferred by the company to two companies, Austmac Ltd and Kookaburra Investments Ltd, in exchange for shares in those companies.

A sum of £172,382.9.0 has been included by the Commissioner in the final assessment made by him in respect of the year ended on 31 October 1936. This sum included an amount of £150,168, which is the balance of profit shown in an account which sets out dealings in shares in the year 1936. The principal question which arises is whether this sum, or any part of it, was income derived from a source in England. The account includes on the credit side three items. First there is a sum of £196,875, which is the value of 350,000 shares at 9s plus exchange in one of the English companies, the Commonwealth Mining & Finance Ltd It includes also a credit item of £9,516, which is the net surplus shown on transactions in shares by way of exchange between two of the English companies, namely Great Boulder Mining & Finance Ltd and Commonwealth Mining & Finance Ltd These amounts are determined by the values placed by the company upon the shares of which it disposed and which it

acquired. The other relevant receipt is £62.10.0, derived from a sale of shares in another of the seven English companies — Anglo-Australian Gold Development Ltd The debit items record reduction in value of shares and loss on sales of shares.

In addition to the shares in the English companies acquired in the manner stated, the company in England purchased shares in those and other companies, received dividends on some of them, and resold some of them in England. As to these transactions it is not disputed that the income so derived was derived from a source in England.

Commonwealth income tax was assessed upon the whole of the profits derived by the company in the year ending 31 October 1936, with the exception of the last-mentioned income, upon the basis that the whole of the said profits were derived from sources in Australia. The Commissioner also determined that any profits (including the excepted income mentioned) derived by the company from sources out of Australia were exempt from income tax in England. The company, as will immediately appear, may not be liable to pay any tax in England on these profits.

In England the company was assessed to tax upon its profits from th whole of the transactions mentioned but upon appeal to the General Commissioners of Taxes it was held (par 32 of admissions) "that the profits assessable were the profits received from the sale of the shares in the Western Australian Companies to the seven English Companies and that in calculating such profits the par value of the Western Australian Companies' shares must be deducted as the cost to the Company of the purchase of such shares. It was agreed that, consequent upon such finding, the assessments failed to be discharged." Apparently the Commissioners in reaching this decision applied the principle which is to be found stated in Craddock v Zevo Finance Co Ltd 1 . On this basis there would be no profits from the share transactions until the receipts from sales exceeded the par value of the shares. At the instance of the Crown a case has been stated in the English proceedings for the opinion of the High Court, but the case has not yet been heard by the Court. Thus the position is that, at the present time at least, it has been decided that no tax is payable in England upon any of the profits in question. The Commissioner, however, did not maintain upon this appeal the contention that the profits were exempt from income tax in England. In my opinion if such an argument had been submitted it would have failed for the reasons stated in Texas Co (Australasia)

Ltd v Federal Commissioner of Taxation 2 . Income cannot be described as exempt from tax because, upon taking an account in order to ascertain the taxable income, the deductible contra-charges exceed the receipts.

The first declaration made was —

"That the business and operation from which the appellant derived its profit were carried out in part in Australia and in part in the United Kingdom, and that for the purposes of s 23(q) of the Income Tax Assessment Act 1936 the income of the appellant is derived in part from sources out of Australia."

The appellant asks that this declaration be expressed in another form so as to be limited to the transactions in question up to the stage when the shares in the English company were acquired. Rich J treated the company as engaged in a profit-making enterprise, namely the business of dealing in shares in England, such shares representing the wares or stock in trade of the company. (The Commissioner in his notice of cross-appeal challenged these findings, but those grounds of appeal were abandoned upon the hearing of the appeal.) His Honour held that the profit was derived partly from an English and partly from an Australian source, and that the profit should be apportioned between the two sources. The shares were locally situated in Western Australia, being shares in Western Australian companies which were transferable upon Western Australian registers. The sales were actually made in England and his Honour said:

"I feel no doubt that if a person, trading in wares which are locally situated in one country, makes a profit by selling them in another country, the source of his profit is in part the wares and in part the contracts of sale, and the locality of the source is in part the locus of the wares and in part the locus of the contracts: cf Maclaine & Co v Eccott (Inspector of Taxes) 3 ; Commissioner of Taxation (NSW) v Hillsdon Watts Ltd 4 ."

His Honour left it to the Commissioner to determine the proper apportionment of income between the two sources.

In Commissioners of Taxation (NSW) v Kirk 5 , their Lordships of the Privy Council considered whether a profit made by selling in England metals mined and treated in New South Wales were derived from a source in New South Wales. Their Lordships said "There are four processes in the earnings or production of this

income — (1) the extraction of the ore from the soil; (2) the conversion of the crude ore into a merchantable product, which is a manufacturing process; (3) the sale of the merchantable product; (4) the receipt of the moneys arising from the sale. All these processes are necessary stages which terminate in money, and the income is the money resulting less the expenses attendant on all the stages." It was held that some part of this income was "earned and arising and accruing in New South Wales" and so was derived from a source in New South Wales. It was said that it was a fallacy to leave out of sight the initial stage and fasten attention exclusively on the final stage in the production of the income. It will be observed that their Lordships referred only to one income. It was not held that there were four incomes corresponding to the four sources which contributed to the production of the income. There was only one income, namely "the money resulting less the expenses" — a balance of receipts over all charges. It was part of that income which was held to be derived from a source in New South Wales. The result was that the income had to be apportioned between New South Wales, the place where the ore was extracted and treated, and England, the place where the product was sold and the purchase moneys were received. Since Kirk's Case this principle of apportionment has been applied in Australia in the interpretation of provisions taxing income according to its source 6 . Under English income tax law it is necessary sometimes to determine the source of particular income 7 , and authorities there cited but no doctrine of apportionment of a single amount of income between sources is necessary under English legislation. Provisions such as s 23(q) and s 25(1)(b) (non-resident taxpayers) in the Commonwealth Act require such an apportionment, and see the legislative provisions for apportionment in particular cases contained in ss 38-43.

In my opinion the decision of his Honour upon this point was right — some part of the profit derived from the transactions of acquiring and disposing of the English shares obtained in exchange for the Western Australian shares was derived from sources in Australia and the other part from sources in England. The parties agree in asking, however, that the form of the declaration should be varied so as to show that some income of the company was derived exclusively from a source in Australia (e.g rents from property in

Western Australia), some from a source exclusively in England (e.g the profits on sale of shares purchased in England which have already been mentioned) and some from a source partly in Australia and partly in England (e.g what the company described as capital appreciation of English shares obtained in England by exchange for Western Australian shares and thereafter sold). The parties also ask for a specific declaration that the income derived from sources out of Australia is exempt from tax in Australia if not exempt from tax in England. I can see no objection to these variations.

But the declaration in this form does not deal specifically with separate items which, on the basis of the company's accounts (whatever the realities may be) are treated as profits derived from trading in shares and as assessable income. I have referred already to the item of £150,168 which is the credit balance in an account containing the three credit items which have already been mentioned.

The credit item of £196,875 represents a supposed gain by the exchange by the company in England of Western Australian shares for shares in one of the English companies, namely Commonwealth Mining & Finance Ltd This is a disposition in England of shares locally situated in Australia and, in my opinion, the rule stated in the passage which I have quoted from the judgment of Rich J relating to the disposition in one country of things locally situated in another country is applicable, so that the profit in this case should be held to be derived partly from a source in Australia and partly from a source in England. The same conclusion follows with respect to the credit item £62.10.0.

The credit item of £9,516, however, is of a different character. It represents an appreciation in value derived by the exchange by the company in England of shares in one English company (Great Boulder Mining & Finance Ltd.) for shares in another English company (Commonwealth Mining & Finance Ltd.). There is no Australian element in the production of this apparent profit. The facts that the company is an Australian company and that the English companies own shares in Australian companies are not in my opinion sufficient to make it proper to declare that any of the profit arose from an Australian source.

As already stated, it is not disputed that profit derived from the purchase in England and sale in England of shares in English companies was derived from an English source. No argument was heard with respect to profits arising from transactions in the shares of three Western Australian companies, Lalla Rookh Gold Mines Ltd, Comet Gold Mines Ltd, and King of Creation Gold Mines

Ltd Counsel informed the court that no questions now arose and that no decision of the court was sought in respect of these matters.

Another item to which some argument was directed is an amount of £2,500 taken by the Commissioner to be a profit upon the disposition of an option to purchase shares in Mephan Ferguson Pty Ltd, a Victorian company. The facts with respect to this transaction are set out in the following admission of fact (par 35):

"During the said accounting period the Company sold in England an option to purchase shares in a Victorian Company known as Mephan Ferguson Pty Ltd and such selling price was £2,500 in excess of the purchase price thereof, which said excess is the sum referred to in paragraph 7 of the said Notice of Objection.

The Company acquired by agreement made in England an option to purchase shares in Mephan Ferguson Pty Ltd and subsequently by further agreement obtained an extension of the option — the cost of the option and extension thereof was £E8,000. Pipe Options Ltd, an English subsidiary of the Company, paid the Company £E10,000 in England for the right to take up the said shares. Subsequently the option expired. The said sum of £A2,500 represents the difference in Australian pounds between the said sums of £E8,000 and £E10,000. The subsidiary Company, Pipe Options Ltd, lost the whole £E10,000 paid to the Company and there was, therefore, a net loss of £E8,000 or £A10,000 on the transaction."

The option which was disposed of was obtained in England and was dealt with in England. Any income derived from this transaction was income derived from a source in England.

In my opinion the order of Rich J should be varied by making with respect to the specific items mentioned the declarations which I have above set out.

The second declaration in the order made by Rich J declares that ss 21, 28 and 31 of the Act dealing with the valuation of trading stock are applicable to the transactions of selling the shares in Western Australian companies. There is no appeal with respect to this declaration.

The third declaration relates to profits made from the realization of shares in English companies and options over such shares. The declaration states that such profits were derived partly from a source in Australia and partly from a source outside Australia. The declaration as it stands applies to all profits made from any realizations of English shares. The company asks that the declaration should be limited to realizations in Australia of such shares.

In my opinion the declaration as it stands is too wide. In some cases English shares were bought by the company in England — and

were subsequently sold. In these cases there was, in my opinion as already stated, no Australian source of the resulting income.

If the declaration is expressed so as to apply to realizations in Australia of English shares then the declaration would, in my opinion, be accurate — the shares being English in respect of locality and the realization of them being an act done in Australia. Therefore the profits would result partly from a source in Australia and partly from a source outside Australia.

But the amendment of the declaration should not, in my opinion, be regarded as involving the proposition that profits derived from realization of English shares in England were in no case partly derived from an Australian source. Where a profit was made by realization of English shares obtained in exchange for Australian shares and it is sought to tax that profit as income under the Commonwealth Act, the question which arises under s 23(q) is a question as to the apportionment of the final balance, representing taxable income of the whole year. In that case there is both an Australian source (namely shares situated in Australia) and an English source (realization in England) of the resulting income. Thus, while I agree that the desired alteration may be made in the declaration, that alteration should not be regarded as involving by any form of inference or suggestion the conclusion that income derived from realizations in England of shares in English companies received in exchange for Australian shares was not also income derived partly from a source in Australia and partly from a source outside Australia.

Declarations 4 and 5 relate to transactions in Lalla Rookh and Comet shares. There are no appeals from these declarations. Declaration 6 relates to the allowance as a deduction of the cost of acquiring properties in Australia. There is no appeal as to this declaration.

The fifth ground of the company's appeal is that his Honour was in error in holding that the cost price to the appellant company of the shares in the twenty-seven Western Australian companies which it sold in England was £52,836.5.8 and that his Honour should have held that such cost price was £118,921.3.11. The former sum was the cost of acquiring, maintaining and developing Western Australian properties up to 31 October 1932. Such cost up to 31 October 1936 was £119,251.1.10 not the amount stated in the ground of appeal. In my opinion it is not necessary to vary the order on account of this error in stating the figures, because the order itself contains no reference to them, and, the parties agreeing that £119,251.1.10 is the correct figure, no difficulty can arise with respect to it.

By the sixth ground of appeal the company contends that his

Honour should have declared that the cost of the shares in the seven English companies acquired by the appellant company in return for shares in the Western Australian companies was nil. When the company disposed of the Western Australian shares to the seven English companies it acquired (a) £481,945 in cash, (b) 1,075,000 shares and (c) options over 1,267,500 shares. There is no more reason for saying that item (b), the shares in the English companies, was acquired for nothing and that value was given for items (a) and (c) than there is for saying, for example, that item (a), the cash, was acquired for nothing, and that value was given only for items (b) and (c). In my opinion the declaration sought by the company should not be made.

Finally, the company objects to the order made as to the cost of the proceedings before Rich J. Success and failure were fairly evenly distributed between the parties and his Honour made no order as to costs. I can see no reason for interfering with this exercise of discretion.

I come now to the cross-appeal of the Commissioner. The first ground of appeal was that his Honour was in error in declaring that the operations of the company amounted to carrying on a business for the purposes of s 28 of the Act and corresponding previous enactments. The second ground was that his Honour was in error in declaring that shares and options formed trading stock within the meaning of ss 28 and 31 of the Act and corresponding previous enactments. The fourth ground of appeal related to the allowance of the cost of acquiring properties as a deduction. These grounds were abandoned upon the hearing of the appeal. The court was, however, asked to include in the order a declaration in the following terms:

"That the assessable income of the taxpayer company to be apportioned for the purposes of section 23(q) of the Act was the difference between the cost to the taxpayer company of the shares in the Western Australian companies acquired by it plus expenditure in relation thereto incurred by it prior to the sale thereof and the total sum ascertained by adding to the cash portion of the considerations received for the sales of the shares in the twenty-seven (27) Western Australian companies the money value, as at the respective dates of the said receipts, of the shares rights and options forming the balance of the said considerations."

I would not add this declaration because in my opinion "the assessable income of the company to be apportioned for the purposes of s 23(q)" is the whole income of the company: that is, in order to ascertain the exemption to which the company may be entitled under s 23(q) it is necessary to inquire in relation to each and every item of income whether it was derived from sources out

of Australia. Accordingly the income in relation to which the question of apportionment arises is not limited to the net income from the transactions mentioned in the proposed declaration.

The Commissioner further asks the court to vary the order by remitting the matter to the Deputy Commissioner of Taxation instead of setting aside the assessment. It is first contended that there is no power in the court to set aside an assessment. My brother Dixon refers in his reasons for judgment to a large number of cases in which the court has set aside an assessment. Section 199 of the Act provides that the court hearing the appeal may make such order as it thinks fit and may by such order affirm, increase, reduce or vary the assessment. In my opinion the initial words of this provision enable the court to set aside an assessment. It is argued, however, that if the assessment is set aside no further assessment (as distinct from an amendment of an existing assessment — see s 170(7)) can be made in this case by reason of the provisions of s 170(2), (3) and (4). It is also objected that, if an entirely new assessment can properly be made, and such an assessment were made, the taxpayer would be able to rely upon entirely new objections, even though those objections were not connected with any alterations contained in the new assessment. Further, s 207 provides that "If any tax remains unpaid after the time when it becomes due and payable, additional tax shall be due and payable at the rate of ten per centum per annum on the amount unpaid, computed from that time." The Commissioner submits to the court that if the present assessment is set aside and a new assessment is made interest on arrears (which, upon the contention of the Commissioner, represents a large amount of money) could be charged only from the date of the new assessment.

On the other hand, the company is concerned that when the Commissioner apportions income as between Australian and English sources there should be a right of appeal if the company were dissatisfied.

In my opinion all the suggested difficulties can be met by altering the form of the order made and remitting the assessment to the Commissioner for amendment in accordance with the order of the court, or by setting aside the decision of the Commissioner upon the objections and remitting the objections to him for re-consideration.

Each party has partly succeeded and partly failed upon the appeal and, in my opinion, no order should be made as to the costs of the appeal.

STARKE J. These are cross-appeals from a judgment of my brother Rich in an appeal brought by the appellant company pursuant to the

Income Tax Assessment Act 1936 (Cth) from its assessment to income tax. The assessment purports to have been based on income derived by the appellant during the year which ended on 31 October 1936, the accounting period of the appellant.

My brother Rich made certain declarations, set aside the assessment and remitted the matter to the Commissioner for re-assessment. The case was heard on admissions and some oral evidence. But only questions, which were described as principles, were argued and questions of quantum were reserved.

The appellant company was registered in Victoria and acquired many mining interests in Western Australia upon which it expended about £119,251. It floated twenty-seven subsidiary companies which were registered in Western Australia and to each of these companies the appellant sold and transferred some of its interest, and received from the subsidiary companies in payment, twenty-seven parcels of fully paid shares of a total nominal value of more than three million pounds. Then, in England, the appellant company sold these shares to seven companies incorporated in England and received as a consideration £481,945 in cash and shares of a nominal value of £1,075,000 with options to take up other shares of a nominal value of £1,267,500. Further the appellant sold a large number of shares in the English companies and a number of options to various persons interested in the promotion of the English companies and it also transferred shares in the English companies, other than those sold as aforesaid, to two subsidiary investment companies, Kookaburra Investments Ltd and Austmac Investments Ltd by way of exchange for shares in those companies.

The balance sheet at 31 October 1936 reflects these involved share transactions in this entry:

Capital Appreciation

Balance as at 31 October 1935

£1,444,034.

Add additional for 12 months ended 31 October 1936

£264,984.

The income tax Commissioner took this figure of £264,984 as the gross income of the appellant for the year ended 31 October 1936 and subject to some additions and deductions arrived at taxable income of £191,700 for the financial year 1936-1937. The final accounts of the company state this appreciation of capital at £15,444 which is brought about, I think, by the exchange reserve, but a reconciliation account annexed to the admissions, Ex. TT, brings out the same taxable balance.

An income tax is imposed upon the taxable income derived during the year of income by any person whether a resident or non-resident

(Income Tax Act 1936 (Cth); Income Tax Assessment Act 1936 (Cth), s 17). A "resident" includes a company which is incorporated in Australia (Income Tax Assessment Act 1936, s 6) "`Taxable income' means the amount remaining after deducting from the assessable income all allowable deductions" (Income Tax Assessment Act 1936, s 6). And "Assessable income" means all the amounts which under the provisions of the Act are included in the assessable income (Income Tax Assessment Act 1936, s 6). The assessable income of a taxpayer includes where the taxpayer is a resident the gross income derived directly or indirectly from all sources whether in or out of Australia (Income Tax Assessment Act 1936, s 25).

It was pursuant to these provisions that the appellant was assessed. Both parties now agree that this assessment cannot be supported.

It was conceded that the sale by the appellant of its mining interests and shares was not merely a realization or conversion of capital assets but the carrying on or carrying out of a business or profit making scheme. Further it was conceded, at all events for the purposes of argument, that the shares received by the appellant in consideration of transfers or exchanges of mining interests or shares should be treated as realized profits assessable to income tax 8 . The appellant contends that its assessment was excessive and it also relies upon s 23(q) of the Income Tax Assessment Act 1936:

"The following income shall be exempt from income tax:

(q) income derived by a resident from sources out of Australia, where that income is not exempt from income tax in the country where it is derived ... "

The parties are agreed that some part of the appellant's income was derived from a source wholly Australian, some part from a source wholly English, and some part from sources partly Australian and partly English. But the appellant insists that the profit which it made on the sale of shares in English companies is income derived wholly from an English source, whilst the Commissioner contends that the source is partly Australian and partly English.

And it was conceded that any income derived from an English source was not exempt from English taxation. It was not stated whether this concession was based upon the decision of this Court in the Texas Case 9 or upon the reasons given for its decision by the

General Commissioner of Taxes for the City of London or upon some other ground. But as both parties agree that income of the appellant company derived from an English source is not exempt from English taxation this court is not called upon to investigate the matter for itself or to consider what is the precise meaning of the phrase "where that income is not exempt" in s 23(q). Indeed, I think, it is better to refrain from so doing until the facts are more certainly ascertained.

So the main question debated before this Court was whether the profit from the sale or transfer by the appellant of shares in English companies in England was income derived wholly from English sources or partly from an English source and partly from an Australian source.

The appellant, as already mentioned, sold and transferred a large proportion of the shares allotted to it by English companies and a number of options acquired from the English companies and it disposed of certain of the shares and options to various persons interested in the promotion of the English companies.

During its income years ended 31 October 1933, 1934, 1935 and 1936, the company's assets as a result of these transactions increased in value in Australian pounds according to its accounts by £1,643,979 of which amount the sum of £271,519 was set aside as a reserve for exchange of this amount of increase £172,382 is the amount included in the final assessment as profit derived by the appellant in the income year ended 31 October 1936. Included in this sum of £172,382 is a sum of £150,168 which is a balance of an account as follows:

To

Anglo Australian

Gold Development Ltd.

Share Acquisition A/c.

£86.8.10.

By Anglo Australian

Gold Development Ltd.

Property Sale A/c.

£62.10.0.

Commonwealth Mining &

Finance Ltd.

Share Acquisition A/c.

16238.19. 4.

Commonwealth Mining

& Finance Ltd.

Property Sale A/c.

(350,000 shares @ 9/-

plus exchange)

196875. 0.0.

Great Boulder Mining &

Finance Ltd.

Promotion & Flotation

Expenses (Shares and

options at prices

other than par)

31346.17. 6.

Great Boulder

Mining & Finance

Ltd.

Share Acquisition

A/c.

9516. 1.8.

North Kalgurli United

Gold Development Ltd.

Share Acquisition A/c.

100.15. 5

Murchison Gold Develop-

ment Ltd.

Share Acquisition A/c.

8302.10. 8.

Southern Cross Gold Dev-

elopment Ltd.

Share Acquisition A/c.

209. 1. 7.

Balance Profit

150168.18. 4.

£206453.11. 8.

£206453.11.8.

========

========

And the balance of £172,382, namely £22,213, is also a balance of an account as follows:

To

Mountain Gold Develop-

ment Ltd

£36.11.0.

By King of Creation

Gold Mines Ltd.

Property Sale

Account

£5498. 6.1.

Lalla Rookh Gold

Mines Ltd.

Promotion and flotation

expenses

124. 2.5.

Lalla Rookh Gold

Mines Ltd.

Property Sale

Account

31446.10.3.

Expenditure

written

off new mines

39616. 9.9.

Profit on sale

of 42,000 shares

in Lalla Rookh

GM Ltd to

Meekatharra

GM Ltd

10500. 0.0.

Reduction in value

written off Golden

Dyke GM NL.

shares A/c.

700. 0.0.

Comet Gold

Mines Ltd.

Property Sale

Account

15245.17.6.

Balance

22213.10.8

-

£62690.13.10

- £62690.13.10.

========

========

And there are some other transactions which must be mentioned.

During the accounting period the appellant bought and sold in England other shares in the seven English companies and the surplus sales over purchases amounted to £15,220 but during the accounting period the value of the companies investments in other English companies fell by the sum of £8,935, leaving a surplus of £6,285.

And during the accounting period the appellant sold in England an option to purchase shares in a Victorian company known as Mephan Ferguson Pty Ltd and the selling price was £2,500 in excess of the purchase price.

The question is from what source or sources these various profits arise or to use Lord Atkin's phrase in Smidth & Co v Greenwood (Surveyor of Taxes) 10 "where do the operations take place from which the profits [or for the purpose of the Income Tax Act `the income'] in substance arise". One rule deducible from the decided cases is that where the essence of the business ordinarily consists in making certain classes of contracts and in carrying those contracts into operation with a view to profit or income then for the purposes of Income Tax Acts, such as here under consideration, the business is carried on within the locality where such contracts are habitually made which is the source of the profit or income 11 .

Another rule is that where the essence of the business is a series of operations with a view to profit or income then the place where one operation is performed cannot be fastened on as the locality from which the whole of the profits or income are derived or as the source thereof. The profit or the income is the money resulting less expenses attendant on all the stages. The source or sources thereof are the places where those operations are conducted 12 .

Turning to the particular amounts appearing in the accounts:

1. Anglo Australian Gold Development Ltd

Property Sale A/c.£62.10.0

Apparently this represents the value of the consideration received during the year on account of the sale of shares in Western Australian subsidiary companies less expenditure. Except that the subject matter of the sale was shares in Western Australian companies the transaction was entered into and wholly carried out in England. But it was said that the transaction was merely a step in the appellant's profit making scheme. Prima facie, in my opinion, the case is governed by the rule in Lovell's Case and the source of the profit or income appears to be exclusively English. But as the assessment must be remitted to the Commissioner in any case he should be free to review the whole circumstances of the case. The parties stated that no further evidence is available other than the facts appearing in the appeal book but I notice that Rich J was asked to grant a commission to take evidence in England which he refused at that stage because he was remitting the matter to the Commissioner.

2. Commonwealth Mining & Finance Ltd

Property Sale A/c£196,875

This transaction is involved but the amount represents the market value of 350,000 shares received in settlement of rights under contracts of purchase. The Commonwealth Mining & Finance Ltd purchased shares in the Western Australian subsidiary companies from the appellant and transferred 350,000 shares in settlement of its obligations under its contracts of purchase. Again the subject matter of the sale was shares in Australian companies but the transaction was entered into and wholly carried out in England. Prima facie, in my opinion, this case is also governed by the rule in Lovell's Case and the source of profit or income was exclusively English. But as the assessment will be remitted to the Commissioner he should also be free to review the circumstances of the case.

3. Great Boulder Mining & Finance Ltd

Share Acquisition A/c£9,516

This represents profit or income in account on the exchange of 124,498 shares for shares in Commonwealth Mining & Finance Ltd Both companies were incorporated in England and the exchange was therefore of shares in English companies. The transaction was entered into and wholly carried out in England. It has no connexion

with Australia and the profit or income is, in my judgment, exclusively English.

4. Balance of Account — £22 213

Items forming this balance are disposed of by the fourth and fifth declarations of the judgment by Rich J which are not the subject of appeal. It is therefore unnecessary to consider further this balance.

5. Surplus — £6 285

The facts already mentioned and the account itself fails to disclose any connexion with an Australian source of this surplus. In my judgment, it is attributable exclusively to an English source.

6. £2 500 — Sale of option to purchase shares in an Australian Company

The only connexion of this transaction with Australia is that the option was over shares in an Australian company. The transaction was entered into and wholly carried out in England which, in my judgment, is the exclusive source of this profit or income.

The declarations made by Rich J remain for consideration.

The first declaration is not quite accurate according to the parties and they consent to the following declaration being substituted:

"That the appellant company derived its profit from its business and operations partly from sources exclusively in Australia, partly from sources exclusively in the United Kingdom, and as to the remainder from a source partly in Australia and partly in the United Kingdom, and that for the purposes of s 23(q) of the Income Tax Assessment Act 1936 the profit of the company which was derived from sources out of Australia is exempt from tax in Australia if not exempt from tax in the United Kingdom."

The declaration seems to state the facts correctly but it is not very enlightening nor, I think, particularly useful. But I suppose the parties can indicate on further proceedings the items under each head. As the facts warrant the declaration and the parties consent, this variation should be allowed.

Declaration 2

In my opinion, the latter part of this declaration should be omitted. The shares and options do not form trading stock within the meaning of ss 28 and 31 of the Income Tax Assessment Act 1936.

Declaration 3

In my opinion, this declaration is too wide as may be gathered from my opinion as to the various items of profit or income already mentioned. But it appears that in one transaction certain shares in an English company were sold in Australia in the year ended 31 October 1934. It related to a parcel of 65,000 Anglo Australian Gold Development Ltd option vendor shares received as part consideration for all the shares in Western Australian companies. The amount of profit derived by the company according to its books was £19,358. After the word "realization" in this declaration the words "in Australia" should be inserted.

And it should be declared that any profit or income derived from the exchange of 124,498 shares in Great Boulder Mining & Finance Ltd, and from the surplus of £6,285 and from the sum of £2,500 all above-mentioned was derived from sources out of Australia within the meaning of s 23(q) of the Income Tax Assessment Act 1936.

But the other amounts above-mentioned should, I think, be re-considered by the Commissioner and no binding declaration should be made as to them.

The Commissioner sought another declaration as to the assessable income to be apportioned for the purposes of s 23(q) but as it is coupled with the third declaration made by Rich J, which cannot be supported, and is obscure in some respects, this declaration should be refused.

My brother Rich set aside the assessment of the appellant and remitted the matter to be dealt with under the Income Tax Assessment Act 1936 and for re-assessment of the appellant's taxable income. The Commissioner contended that there was no power to set aside an assessment but the words of s 199 of the Income Tax Assessment Act 1936 and the frequent orders of the Court made in pursuance of that section amply sustain the order made. But it was contended that as a matter of discretion the assessment should not have been set aside but only the decision of the Commissioner upon the appellant's objections and those objections remitted for re-determination and consequent amendment of the assessment. It is difficult, I think, to relate the judgment of Rich J or of this Court to the actual objections of the appellant and in any case it is clear enough that any amendment of the appellant's assessment will involve an assessment upon an entirely new basis.

It appears to me somewhat unfair and unjust that the appellant should have to pay heavy interest from a past date upon a sum ascertained for the first time by an assessment amended pursuant to the judgment of this Court.

My brother Rich exercised his discretion with all the facts before him and I see no sound reason for interfering with his order in this respect.

Subject to the amendments, variations and additions already mentioned this appeal and cross-appeal should be dismissed.

DIXON J. This matter comes before us by way of appeal and cross-appeal from an order made by Rich J under s 199 of the Income Tax Assessment Act 1936 (Cth). The order contains six declarations concerning the manner in which the taxpayer company's income should be assessed, having regard particularly to s 23(q) of the Act. It proceeds to set aside the assessment of the Commissioner and it remits the matter to him to be dealt with under the Act and for the re-assessment of the company's taxable income consistently with the order.

The Commissioner, under his cross-appeal, objects to the course adopted in the order upon the grounds, first, that s 199 gives the Court no jurisdiction to set an assessment aside, and, secondly, that, if the Court does possess such a jurisdiction, it ought not to have been exercised in the present case, because of the consequences produced by vacating the assessment.

The first ground of the objection attempts to place a restriction upon the power of the Court in dealing with taxation appeals which, I should think, would prove awkward both from the point of view of the Court and of the Commissioner.

When it is decided that the principle upon which an assessment of taxable income has been based is erroneous, it becomes necessary to reassess the income in detail and that is a thing which the Court cannot well do and which ought not to be taken out of the Commissioner's hands. It sometimes happens that a decision on appeal from the Commissioner or the Board of Review does go to the basis of an assessment. In such a case a re-assessment ab initio will be found desirable, if not necessary. When that has happened or when, for other reasons, it has been considered desirable that the Commissioner should make a new assessment in the light of the Court's decision, orders have repeatedly been made for the remission of the assessment to the Commissioner for re-assessment. There have also been cases where it has been thought necessary simply to quash the assessment outright. Thus many orders setting aside assessments have been made. Some orders have expressly set aside the earlier assessment as a preliminary to ordering a remission. Others, without expressly setting aside the assessment, have remitted it for re-assessment. But the remission of a proceeding for re-consideration, re-determination, re-hearing or the

re-doing of any other act in the law in relation thereto necessarily involves the setting aside or avoidance of what was first done in the proceeding. Because so many tax questions are decided upon cases stated, the final order disposing of taxation appeals does not appear in the reports but examples of orders in one form or another setting aside assessments will be found in a number of report cases 13 .

Sometimes the Commissioner's decision upon the objections, not his assessment, has been set aside and the remission of the matter to him has been for the purpose of re-considering the objections 14 .

The language of s 199(1) appears to me quite general enough to empower the Court to make orders setting aside assessments whether for the purpose of directing re-assessment or in order to give effect to a determination that there is no liability to assessment. I see no reason for restricting the words "such order as it thinks fit" to the kinds of order specifically referred to in the sub-section, viz orders confirming reducing increasing or varying assessments. It would be a misfortune if such a restriction were placed on the provision. For justice could not be done in some cases unless the Court could quash an assessment, and, in others, unless it could vacate an assessment and remit the question of the amount of the taxable income to the Commissioner for complete re-assessment.

The second ground for the objection goes, not to the existence of the power, but to its exercise in the circumstances of the present case. It was said that, because the original assessment had been made as long ago as 20 April 1938, there was a danger of the taxpayer's contending, under s 170, that the re-assessment was bad

because out of time. That on the part of the taxpayer company some such contention was in contemplation appeared to be true enough, but, ultimately, counsel for the company said that an objection on that ground would not be made to the re-assessment, if and when made pursuant to the order of Rich J. I do not think that the company suffered by this concession; for I can see nothing whatever in s 170 to support the point abandoned. But, under the second ground of objection, more solid reasons were advanced by counsel for the Commissioner against setting aside the assessment. Reference was made to other proceedings before us from which it had appeared that for a very long time the taxpayer company had contrived to delay making any substantial payment on account of tax, and it was pointed out that, on any view of the merits, the liability of the company would amount to a considerable sum. If the assessment were altogether set aside, the additional tax of ten per cent per annum prima facie payable under s 207 on unpaid tax would clearly not be recoverable in respect of the amount finally ascertained to be the tax for which the company is liable. That is to say the ten per cent per annum would not run from the date fixed by the original assessment for payment but only from the date of payment prospectively fixed by the new assessment. Then the fresh assessment would be open to any objection whatever and the company would not be limited to the grounds they had thought fit to take by way of objection to the present assessment. That, of course, might afford a new means of delaying the settling of the amount of the company's liability.

I do not think that the attention of Rich J was drawn to these consequences of setting aside the assessment. Otherwise, he probably would have moulded the order so as to avoid them. To do so it is only necessary to bring the operation of the order forward, so to speak, from the procedure of assessment to the procedure on objection, and, instead of directing a re-performance of the duty of assessment, to call upon the Commissioner to give effect to the declarations contained in the order in the course of again dealing with the taxpayer's objections. If, instead of setting aside the assessment, the order were to set aside his decision on the objections and remit the objections to him for re-consideration and for re-determination in conformity with the declaration contained in the order, then the ground of the Commissioner's fears or complaints would disappear. If, in other respects, it is our opinion that the order should be supported, then I think that we should re-mould it so as to adopt this course.

The chief issue before Rich J arose under s 23(q) of the Income Tax Assessment Act 1936. The material part of that provision places

in the list of income exempt from income tax income derived by a resident from sources out of Australia where that income is not exempt from income tax in the country where it is derived.

The taxpayer company is incorporated in Victoria and, therefore falls within par (b) of the definition of "resident" in s 6. Under s 25(1)(a) its assessable income includes the gross income derived directly from all sources, whether in or out of Australia, which is not exempt income.

Apart from the operation of s 23(q) there is no question before us of the liability of the taxpayer company in respect of the whole of its income from all sources, nor of the basis upon which the income is computed or assessed. So far as we are concerned the matter turns altogether upon the proper application of s 23(q). That provision is shortly expressed, but its brevity conceals some difficulties. It will be seen that it lays down two conditions; first, that the income shall be derived from sources out of Australia, and, second, that the income shall not be exempt from taxation in the country where it is derived. The first condition can be of little practical importance, because, in satisfying the second condition, it must always be shown that the first is fulfilled. On the other hand, to show that the income if derived from sources out of Australia does not necessarily show where it is derived. For there may be several countries in question. Accordingly, s 42 can have no application. For it provides only for cases where the question is whether the whole or any part (and if a part what part) of any profit is derived by a person from sources in Australia. It is the converse inquiry, viz what income arises out of Australia in some other and what country.

The cardinal question in the present case is how much of the taxpayer company's income for the relevant accounting period is derived from England and is not exempt from income tax in that country "Exempt" does not, I think, mean that the income must be the subject of a specific exemption or exception under the law of the country where it is derived. The word is used, I think, inartificially to mean "not subject to tax". But it is obvious that there may be a difficulty in identifying the income which is subject to tax and isolating it in the Australian assessment. For the latter assessment will be compiled without regard to territorial limitations and without dividing up a total business or connected series of operations into separate components or steps according to political boundaries. Yet the tax abroad may be levied only on what is attributable to that severable part of the total operations which takes place in the other taxing country.

Section 23(q) appears to require for its application the fulfilment of some not very easy conditions. For it contemplates specific

income not exempt from tax in the country where it is derived. It applies where income from all sources is brought into tax under Australian law on the ground of residence. It supposes that it will be possible out of the total income of the taxpayer to segregate specific income of which it may be predicated that it is not so exempt. But it is evident that, where business operations or transactions spread from Australia to a country or countries overseas, the course of accounting by which the income resulting from the entire operations or transactions is ascertained may, and indeed almost certainly must, depart widely from that employed in the other country for the purpose of finding what income was derived there by a taxpayer who, except in cases of dual residence, will ex hypothesi be a non-resident. Take, for instance, the case of a resident of Australia producing merchandise here and selling it in the United Kingdom. In the Australian assessment his assessable income will be the gross proceeds arising in the United Kingdom, and his taxable income will be obtained by deducting expenditure the greater part of which is incurred in this country as costs of production. Yet, if r 12 of the All Schedule Rules of the Income Tax Act 1918 (UK) is invoked, the income derived in the United Kingdom would be assessed on the basis of the profits that a merchant might have earned if he had bought the merchandise direct from a manufacturer or producer.

The reasoning which this Court applied in Texas Co (Australasia) Ltd v Federal Commissioner of Taxation 15 to the analogous but somewhat different provision made by s 14(1)(q) of the Income Tax Assessment Act 1922 is, perhaps, relevant to s 23(q). That reasoning may result in the exemption given by s 23(q) being construed as applicable to assessable, as distinguished from taxable, income: a construction supported by par (b) of the proviso introduced by the Income Tax Assessment Act 1941 (Cth) (Act No 58 of 1941). The consequence would be that, in ascertaining whether the income is "not exempt" in the country where it is derived, the fact that owing to losses and outgoings in that country it is wiped out and so not actually taxed may be disregarded as immaterial. But it would be a mistake to suppose that everything on the debit side of a trading or profit and loss account represents such an actual loss or outgoing. In the example given, the value placed upon trading stock in England may mean no actual expenditure at all. It may mean that, under the application given to the tax laws of the United Kingdom, trading stock produced in Australia is valued on the basis of an increase in value over the costs of production in Australia and of transportation.

That would only be another way of saying that, of the full profit realized by the sales in Great Britain from the whole of the operations of the business or from the entire transaction, the amount represented by the increased value so placed on the trading stock is to be attributed, not to a source in the United Kingdom, but to an Australian source. So much of the profit would, therefore, be excluded from the ambit of the United Kingdom tax and it would be untrue to say that it was "not exempt from income tax in the country" (viz the United Kingdom) "where it was derived" (scil as the gross proceeds of sale).

In the case under our consideration, the taxpayer company did not market in the United Kingdom goods produced in Australia. It carried on what doubtless was an interconnected series of operations beginning with the acquisition of mining rights and the like in Western Australia and ending in the conversion into money in England of shares of which it became possessed by successive promotions of companies.

The appeal concerns the assessment of the taxpayer company for the financial year 1936-1937 based upon income derived from all sources during an accounting period of twelve months ended 31 October 1936. The facts brought before the Court do not include a great deal of information about the transactions outside this period, though probably it is a case which would become clearer if the matter were examined as what Lord Sumner described as "one continuous story" so as to "show method and system and so remove" doubt which might be entertained if the years were examined "in isolation from one another" 16 . But, however that may be, it is certainly a case which should be considered in reference to its concrete facts. In the end, I think that our decision is confined to very narrow ground, because of the course adopted by the parties both before Rich J and on appeal. But, even so, I do not think we should deal with it in any abstract way. The application of s 23(q) must be controlled by the precise facts of any given case in which it is invoked. I shall, therefore, proceed to set out what I conceive to be the state of facts relevant to the application of the provision, as I collect them from the materials before us.

As to the general plan of the company's operations, it is enough to say that, beginning about 1929, it acquired mining reservations or "leases" in Western Australia, maintained and developed them and then proceeded to incorporate a great many companies in Western Australia, twenty-seven in number to be precise, to take them over

in consideration of shares. Up to 31 October 1932 (the end of the taxpayer company's accounting period of that year), the expenditure it had incurred in acquiring the mining interests, maintaining and developing them and in promoting the twenty-seven companies in Western Australia was £52,836.5.8. The property and interests upon which this sum, up to that date, had been spent were transferred to the twenty-seven companies for a consideration in shares, presumably fully paid up, amounting in nominal value to £3,153,240. Subsequently further sums of money were expended by the taxpayer company in maintaining and developing the mining reservations and the promotion of companies and so on with the result that, by 31 October 1935 as I gather, the expenditure stood at £119,251.1.10. But, by that date, seven companies had been formed in England, each of which had taken over or agreed to take over the shares held by the taxpayer company in a group of the Western Australian companies. The total shareholding of the taxpayer company in the twenty-seven Australian companies, which in the meantime had somewhat increased, was divided into seven groups and all of it was thus made over to the seven English companies.

The consideration consisted of shares, presumably paid up, in these companies amounting in nominal value to £1,075,000, of options to take up further shares, and of cash amounting to £481,945.

These transactions all took place in England. The names of the seven English companies were — Anglo Australian Gold Development Ltd, Gold Fields Australia Ltd, North Kalgurli Gold Development Ltd, Murchison Gold Development Ltd, Great Boulder Mining & Finance Ltd, Southern Cross Gold Development Ltd and Commonwealth Mining & Finance Ltd.

The taxpayer company also formed in England other companies and two of them play a part in the material transactions of the accounting period under consideration. They were Kookaburra Investments Ltd and Meekatharra Gold Mines Ltd The first of these was one of two companies promoted for the further exchange of shares. The second appears to have been formed to take over the shares of fresh Western Australian companies.

The items which for the relevant financial year, viz. 1936-1937, raise the question how and to what extent s 23(q) applies may best be explained by some analysis of the assessment. Fortunately the analysis need only be partial.

The amount of taxable income upon which the company was finally assessed (by notice of amended assessment dated 19 March 1942) was £191,700. This total was made up of three heads of income, or alleged income. They are — (1) An amount of

£150,168.18.4d being the net balance of certain gains, real or supposed, in connexion with shares in three of the English companies, viz. Commonwealth Mining & Finance Ltd; Great Boulder Mining & Finance Ltd; and Anglo Australian Gold Development, the net balance remaining after debiting against them certain expenses and deficiencies; (2) an amount of £22,213.10.8d being the net balance of certain gains (actual or hypothetical) in connexion with shares in three Western Australian companies, viz. King of Creation Gold Mines Ltd; Lalla Rookh Gold Mines Ltd and Comet Gold Mines Ltd; it is the balance remaining after throwing against these gains certain debits the nature of which is not material; (3) an amount of £19,317.11s.0d based upon a so-called profit and loss account containing receipts and disbursements on account of revenue and carrying on its credit side items of income from Western Australia, comprising rents, dividends, interest, certain share dealings, receipts from treatment of tailings and profit on the sale of carbons and diamonds and two items ascribed to London, namely share dealings, £6,285.2s.11d, and profit on the sale of options over shares in a Victorian company, named Mephan Ferguson Pty Ltd, £2,500.

I shall deal with these three headings in order.

(1) The chief source of the balance of £150,168.18s.4d is a credit item of £196,875,0.0. It consists of the value placed upon 350,000 paid up shares of 5s in Commonwealth Mining & Finance Ltd, a company registered in England. The value assigned to the shares was 9sE converted into Australian monetary expression. By contracts, dated 17 May 1934, this company agreed to purchase shares held by the taxpayer company in five of the Western Australian companies to the number of 677,500. In effect, the consideration was the allotment of share in the purchasing company. It allotted 350,000 shares to the taxpayer company in settlement of the latter's rights under these contracts.

The taxpayer company took the shares into its accounts for the accounting period under consideration at the value of 9sE a share. Converted to pounds Australian this amounts to £196,875. Before the end of the period the taxpayer company sold 200,000 of the 350,000 shares in Commonwealth Mining & Finance Ltd to the subsidiary company it formed in the United Kingdom named Kookaburra Investments Ltd, for 90,000 paid up shares of £1.0.0, that is the nominal equivalent of 9sE. This transaction, however, is not treated as contributing to the supposed gain. Indeed shortly afterwards, but in the next accounting period, a general devaluation took place both by Kookaburra Investments Ltd and by the taxpayer company. It will be noticed that the source of what is

treated as an item of gain, viz the value assigned to the shares issued to the taxpayer company by Commonwealth Mining & Finance Ltd, is the disposal of shares in Australian companies to an English company.

The second of the three items under this heading goes to the next step in the taxpayer company's dealings. It arises from the exchange of shares in one of the companies formed in England, called Great Boulder Mining & Finance Ltd, for shares in Commonwealth Mining & Finance Ltd, which, as already stated is another such company.

The shares in Great Boulder Mining & Finance Ltd, 124,498 in number, were apparently valued in the taxpayer company's books at 4s.4½d each and were exchanged for an equal number of shares in Commonwealth Mining & Finance Ltd which were valued at 6s.3d each. The surplus, real or fictitious, shown as produced by this transaction, viz £11,671,13s.9d was diminished by debits consisting in a small loss on the sale of some unnamed options and the reduction in value of some other shares, also unnamed. The residue, £9,516.1.8, constitutes the second of the three items under the first heading.

The third item is a small sum of £62.10s.0d said to have been gained, probably in shares, upon a sale of Australian shares to another of the companies formed in England, called Anglo Australian Gold Development Ltd, presumably for shares.

(2) Under the second heading the so called profit and loss arises from the formation during the accounting period by the taxpayer company of three companies in Western Australia for the acquisition from it of gold mining rights. In each of the three cases the gold mining rights "leases" etc, were transferred to the company so formed and, whether the consideration was expressed in shares or not, it was satisfied in shares, or, at all events, shares were taken up of equal or greater amount.

The order of Rich J declares that up to this point no profit was made and from these declarations there is no appeal. But the taxpayer company took a further step. It disposed of the shares in the Western Australian companies to other companies, in one case apparently for money, and in the other two in exchange for their shares. In one of the two latter cases the second company was incorporated in Western Australia and no question under s 23(q) arises from that transaction. But in the other two cases the shares were transferred to English companies. In the case of the exchange of shares the nominal amount of the shares in the English company which presumably were fully paid up would suffice to disclose an apparent profit if compared with the expenditure incurred in

connexion with the acquisition and development of the leases and the carrying out of the transaction by the taxpayer company. Further, though the nominal amount of the shares in the Western Australian company and in the English company were the same, there was a difference in the currency and that meant an increase in relative value by 25 per cent. In this transaction Lalla Rookh Gold Mines Ltd was the Western Australian company whose shares were transferred to an English company and Meekatharra Gold Mines Ltd was the English company.

In the third case, that of shares in Comet Gold Mines Ltd, the facts admitted show that the sale to the English company or companies was completed by the payment after the close of the accounting period of a cash consideration. In the meantime at the close of the period the taxpayer company took into its accounts as a profit the difference between the amount expended in connexion with the leases etc and the amount of the nominal value of the shares in the Western Australian company. This sum, however, according to the unappealed declaration already mentioned contained in the order, is not a profit. Upon this state of facts I do not think that we are concerned with the transaction.

The result is that under the second heading (that relating to the sum of £22,213.10s.8d) all that concerns s 23(q) is the transaction by which shares in the Western Australian company, Lalla Rookh Gold Mines Ltd, were sold for shares in the English company, Meekatharra Gold Mines Ltd The nominal value of the shares was £E42,000, and, according to another part of the same declaration unappealed, there should be deducted from the proceeds of sale the sum of £10,533 together with incidental expenses, that is the amount spent in the acquisition and development of the leases plant etc. It is not clear whether for the purpose the shares in Meekatharra Gold Mines Ltd are to be considered "proceeds of sale".

(3) Under the third heading two items only concern s 23(q). One item is a surplus produced during the accounting period by the purchase and sale by the taxpayer company of shares in English companies. The surplus amounted to £15,200.5s.6d, but it is reduced by debits arising from other dealings which need not be considered, to £6,285.2s.11d. The credit items in the statement of transactions giving rise to this surplus consist in the proceeds of the sale of shares in Commonwealth Mining & Finance Ltd and Great Boulder Mining & Finance Ltd It would appear that these transactions have no territorial connexion with Australia except that the two companies held shares in the Western Australian Mining companies.

The other item is a sum of £2,500 representing the difference

between the sum paid by the taxpayer company for an option acquired by an agreement made in England over shares in a Victorian company called Mephan Ferguson Pty Ltd and the sum for which the option was resold in England to Pipe Options Ltd, a subsidiary company formed by the taxpayer in England. So far as this represented a profit at all, probably it should be considered to have arisen in England. Except that the shares over which the option was granted were in a Victorian company, there is nothing to take the transaction territorially outside of England. But since the option expired and proved valueless and since Pipe Options was a subsidiary company, obviously there are grounds for doubting whether the supposed profit was not illusory.

From the foregoing it will be seen that, stated summarily, there are six items of "gain", real or supposed, in respect of which s 23(q) is invoked, gain not in the sense of realized profit, but of growth of or increase in a credit or credits.

They are: (1) The value, namely 9sE a share placed upon the 350,000 shares acquired in the English company, Commonwealth Mining & Finance Ltd, in consideration of shares in Western Australian companies.

(2) The difference between 6s.3d a share (the valuation) on 124,498 shares in the English Commonwealth Mining & Finance Ltd acquired in exchange for a like number of shares in the English Great Boulder Mining & Finance Ltd and 4s.4½d a share, the value placed upon the latter.

(3) The gain of £62.10.0 on the acquisition of shares in the English Anglo-Australia Gold Development Ltd in consideration of Australian shares.

(4) The gain arising upon the transfer of shares in the Western Australian Lalla Rookh Gold Mines Ltd in consideration of shares in the English Meekatharra Gold Mines Ltd consisting substantially of the difference between the amount expended in respect of the original "leases", promotion etc and the nominal value of the shares acquired and converted for expression into Australian money, the transaction the subject of the fourth declaration, unappealed.

(5) The surplus upon the purchase and sale of shares in English companies (shown as a net item of £6,285.2.11d).

(6) The gain (£2,500) on the acquisition and disposal in England of an option over shares in a Victorian company.

All these dealings took place in England and it may be assumed that they took place in the course of a trade exercised within the United Kingdom, the profits whereof would be chargeable under Sch. D of the Income Tax Act 1918 (UK). On this footing it was not denied on the part of the Commissioner that, in so far as the

gains thereof comprised in the assessment were not ascribable to the Australian character of the shares or assets transferred, the income was not only derived from a source out of Australia but was not exempt from income tax in Great Britain where it was derived, so that to part of it at least s 23(q) had an application. The curious thing, however, is that, on appeal from the English assessments to tax, the General Commissioners decided that no tax was payable in the United Kingdom in respect of any relevant period. All we know of their reasons is expressed in the following passage from the mutual admissions of fact:

"The Commissioners held that the profits assessable were the profits received from the sale of the shares in the Western Australian companies to the seven English companies and that in calculating such profits the par value of the Western Australian companies' shares must be deducted as the cost to the company of the purchase of such shares. It was agreed that consequent upon such finding the assessments fell to be discharged."

It seems evident that the General Commissioners took the view that for the purpose of the trade exercised in the United Kingdom the paid up shares in the Western Australian company must be treated for the purpose of the account as having been obtained by the company for a consideration equivalent to their nominal value. If it were otherwise, the requirements of the company law would not have been satisfied and the shares would not, upon a liquidation, stand as fully paid up. In other words, they would seem to have applied to the ascertainment of the cost or value of the shares as they came into the "trade" within the United Kingdom, the doctrine of such company cases as In re Theatrical Trust Ltd (Chapman's Case) 17 , notwithstanding that it was a revenue matter. It is the view from which the decision mentioned by Williams J during the argument, Craddock v Zevo Finance Co Ltd 18 , starts. See further the reference to that case in the judgment of Williams J in Associated Newspapers Ltd v Federal Commissioner of Taxation 19 . That means that, for the purpose of the imposition of the income tax in the United Kingdom, the comparison was not between the actual losses and outgoings of the taxpayer company and its gains or receipts recovered in the United Kingdom, but between the value imputed as the result of a legal presumption to the shares or to the consideration paid for them. That value or consideration was

the result of a transaction which, for the purpose of the Australian assessment of income from all sources, was only an intermediate step without any special accounting significance; but, in England, it fixed the value at which the shares came into the account for the purpose of the trade there exercised. The reason why it was agreed before the General Commissioners that this view meant that the English assessments fell to be discharged lies in the fact that the nominal value of the paid up shares in the Western Australian companies was £3,152,240 and nothing like that sum was recovered by the transactions in England. To my mind this is not a question of a loss or outgoing in the trade exercised in England wiping out assessable income there gained. It appears to me to amount to a decision that before the Western Australian shares considered as assets were disposed of in England, or taken into the "trade" there exercised, they stood at a value which contained whatever profit the entire transaction showed, so that the dealings in England were but a realization of part of the unrealized profit or increased value which had already accrued as a result of the operations out of the United Kingdom. If so, it is perhaps not so clear that the income with which we are concerned under the first, third, fourth and even the second of the foregoing items of gain is not exempt from income tax in the United Kingdom. On the other hand, it may not perhaps have much bearing on the fifth or the sixth.

But it is unnecessary to pursue the difficult question of the identification of the income not exempt from tax in the country where derived, since the parties who, doubtless, have more information about the facts than the materials before us disclose, are at one in treating s 23(q) as applicable to so much of the assessable income as is ascribed to the operations of the taxpayer company in England as a source.

What we are asked by the parties to decide is of a limited description. In the first place, we are, in effect, asked to decide a proposition expressed in the third ground of the taxpayer company's notice of appeal from the order of Rich J. That ground seeks to have added to the declarations made by Rich J a further declaration

"that the income derived by the appellant company in the tax year ended 31 October 1936 by trading in England in shares in English companies whether such shares were acquired in return for shares in the Australian companies or otherwise or in other property not situated in Australia was derived exclusively from a source in the United Kingdom and is not liable to income tax under the legislation of the Commonwealth if that income so derived is not exempt from income tax in England."

The application of this proposition to the precise items of gain I have enumerated was not brought out very clearly, or perhaps at all, during the argument. I should prefer to be in a position of deciding the ultimate question in respect of each item, namely whether it should, or should not, be excluded under s 23(q) in ascertaining the taxable income. But that we are not asked to do and it appears to be assumed on both sides that the materials which they placed before Rich J are inadequate for the purpose.

Further, the parties have agreed upon a form of declaration which they desire to have substituted for the first declaration made by Rich J. His Honour's declaration said —

"That the business and operations from which the Appellant derived its profit were carried out in part in Australia and in part in the United Kingdom, and that for the purposes of s 23(q) of the Income Tax Assessment Act 1936 the income of the Appellant is derived in part from sources out of Australia."

That seems to me to be correct, but not to carry the matter very far. However, for some reason I have not grasped, the taxpayer, the appellant, seems to have considered that the words "in part" did not provide for items of revenue like interest and dividends derived altogether from England, items excluded from the assessment as finally amended. We were told that the parties were agreed in the substitution of the following declaration —

"that the appellant company derived its profit from its business and operations partly from sources exclusively in Australia, partly from sources exclusively in the United Kingdom, and as to the remainder from a source partly in Australia and partly in the United Kingdom, and that for the purposes of s 23(q) of the Income Tax Assessment Act 1936 the profit of the company which was derived from sources out of Australia is exempt from tax in Australia if not exempt from tax in the United Kingdom."

I suppose that we ought to make this substitution by consent. It is in the light of the substituted declaration that we are asked to say that the income from trading in England in shares in English companies was exclusively derived from a source in the United Kingdom. But s 23(q) does not use the word "exclusively" and it uses the word "source" only in the opening clause, "income derived from sources out of Australia". I think that the parties are entitled to have it decided, assuming the materials are sufficient, whether given "income" is derived from sources out of Australia and that question I am prepared to consider and, if possible, decide in reference to each of the items of income I have enumerated. But it is a single though complex question whether "that income is not exempt from income tax in the country where it is derived", and I

am not prepared to embark on the hazards which may attend declarations of right based on an attempt to split it up into supposed components some or one only of which are to be submitted for decision.

I regard it as clear that the second, fifth and sixth of the foregoing items are credits arising from sources out of Australia.

The fifth has no connexion with Australia. The shares in the two English companies appear to have been purchased and resold in England without reference to any Australian ingredient except that the assets of each company comprised holdings in Australian companies.

In the sixth case there was a dealing in England with an option or options. The fact that the options were over shares in a Victorian company does not seem to me enough to bring the source of the credit into Australia.

The second item, the supposed enlargement of value by reason of the exchange of shares in one English company for those in another seems, prima facie, to be remote from a source in Australia and there are no facts to show otherwise.

The first of the above mentioned items depends on somewhat different considerations. The shares disposed of were in the capital of an Australian company. The credit in question is the gross value set upon the consideration obtained for them in England. The consideration arose in England from a transaction in England and if attention is confined only to the amount so obtained an Australian source is not readily discernible. But suppose an attempt is made to dissect the amount obtained in the hope of finding how much of it represents the value attached to the Australian shares out of England and how much to the "operation" of the company in England and the consequent creation of a market there for the shares. If such a dissection could be made, it might be said that only the second part was attributable to Great Britain. But to make such an attempt at dissection is really to construct an English trading account in respect of this block of shares and to deduct from the amount obtained the value of the shares as at the time they were appropriated to the English trade. To do so deserts the hypothesis of the parties that we are concerned only with assessable income, if adherence to that hypothesis really matters under s 23(q). But what may be more important, it is the first step in the process adopted by the General Commissioners in England. If the second step were taken of treating the Australian shares as having a par value, it would seem that this transaction would show no English profit, and then, I think, it might plausibly be urged that none of the profits were "not exempt from tax" in the United Kingdom. About these

matters there is hardly enough information before us to enable us to deal with them, and, although prima facie the supposed enlargement of assets arose in England, I do not think that we are on safe enough ground to make a declaration binding the Commissioner to reassess upon the basis that none of the gain of the first item arose from sources in Australia.

These observations are applicable in substance to the fourth item and to the third, though the amount of the latter is so small that it might be neglected among such high figures involving so many difficulties.

There are some minor matters to be disposed of raised by the notices of appeal and cross-appeal.

(1) The third declaration contained in the order states that the profits made from the realization of shares in English companies etc were derived partly from a source within and partly from a source outside Australia. It is contended that this declaration should be restricted to realizations in Australia of such shares and that it was so intended. One transaction by which English shares were realized in Australia was pointedly drawn to the attention of Rich J and the declaration may indeed have been directed to it, though it is true that the date given for it seems to show that it fell outside the accounting period. But, in any case, the views I have expressed make it right to limit the declaration to realization in Australia.

(2) The second paragraph of the second declaration refers to s 28 of the Income Tax Assessment Act. As at present advised I am not prepared to hold that the shares were "trading stock" within the meaning of Div 2, sub-div. B, ss 28-31, though this does not necessarily mean that the principles of accounting embodied in those provisions are themselves altogether inapplicable. At the same time it is proper to remark that some of the facts of the case do suggest the possibility of a question whether the share manipulations of the taxpayer company ought to have been treated as a source of income before realization in money and, perhaps even then, whether they should have been so treated before a clear detachable surplus arose or a profit was acknowledged in a final manner 20 .

(3) The sixth ground of appeal seeks to have the value of the shares in the English companies brought into account at nil. The object is, of course, to throw as much of the profit as possible into

England in the hope of securing exemption for it under s 23(q). On the view I have expressed this ground cannot be acceded to.

(4) Upon the cross-appeal the only other matter calling for reference is ground (c) of which an amended text was handed up. The ground is rather pointed at a passage in the reasons of Rich J than to any part of his Honour's order. The use of the words "assessable income" in the declaration sought causes some difficulty, having regard to what follows, but, in any case, I think we ought to make no declaration upon the lines of this revised ground of appeal, the practical meaning and effect of which is not clear to me.

(5) Lastly, the appellant complained of the exercise by the learned judge of his discretion in respect of costs. His Honour directed that there should be no order as to costs. In the view the learned judge took of the case, I cannot see why this was not an admissible view of what was just in respect of costs. Nor do I think that the variations of the decree that I would make should lead us to adopt a different view as to the costs of the hearing before Rich J. Moreover, I would allow the parties to abide their own costs of this appeal from his Honour's order.

I would make the following order:

(1) By consent vary the first declaration in the order appealed from by substituting therefor the paragraph set out in ground (1) of the notice of appeal.

(2) Vary the second declaration in the order by omitting the second paragraph thereof.

(3) Vary the third declaration in the order by inserting the words "in Australia" after the word "realization" and before the words "of shares".

(4) Vary the order by adding a seventh declaration to the effect that (a) the income or gain alleged to have arisen from the exchange mentioned in par 26 of the admissions of fact (Ex. B), of 124,498 shares in Great Boulder Mining & Finance Ltd for the same number of shares in Commonwealth Mining & Finance Ltd; (b) the income or gain arising from the surplus produced by the sale mentioned in par 34(i) of the said admissions of fact of shares in Commonwealth Mining & Finance Ltd and Great Boulder Mining & Finance Ltd; (c) the income or gain arising from the transaction mentioned in par 35 of the said admissions of fact; were derived by the appellant company from sources out of Australia within the meaning of s 23(q) of the Income Tax Assessment Act 1936.

(5) Vary the order that the assessment be set aside and the consequent order for remission for re-assessment by substituting an order that the decision of the Commissioner upon the objections be

set aside and that the objections be remitted to the Commissioner for re-consideration and re-determination conformably with this order.

Otherwise subject to the foregoing variations confirm the order appealed from and dismiss the appeal and cross-appeal.

No order as to the costs of the appeal and cross-appeal.

McTIERNAN J.

I agree with the order formulated in the reasons for judgment of my brother Dixon and with his reasons.

WILLIAMS J. The origin of this appeal and cross-appeal is an amended assessment of the appellant company by the respondent for income tax under the Income Tax Assessment Act 1936 (Cth). The assessment which was made on 19 March 1942 is in respect of the company's taxable income derived during the period 1 November 1935 to 31 October 1936. This period was adopted by the appellant and accepted by the respondent in lieu of the financial year 1 July 1935 to 30 June 1936.

The appellant appealed to this Court under s 197 of the Act. The appeal came on for hearing before Rich J who made an order of an interlocutory nature on 23 June 1944 and a final order on 8 October 1945. By the final order he made six numbered declarations and ordered that the assessment be set aside and the matter remitted to the respondent to be dealt with under the Income Tax Assessment Act and also for re-assessment of the appellant's taxable income consistently with this order. The appeal and cross-appeal are against portions of this final order.

The evidence before his Honour consisted of a large number of admissions relating to dealings of considerable complexity. But it is common ground that the present assessment cannot stand and that there will have to be a re-assessment in some form so that I do not propose to discuss the facts in any detail.

The appellant is incorporated in Australia and is, therefore, a resident taxpayer within the meaning of the Act. Prior to the year of income it acquired a number of properties in Western Australia which, as his Honour said, were supposed to contain minerals. It caused twenty-seven subsidiary companies to be incorporated in Western Australia and sold and transferred certain of these properties to each of these companies, the consideration being the allotment of fully paid shares in the subsidiary companies. It then sold the shares in the twenty-seven Western Australian companies to seven English companies, the consideration being partly cash £481,875, partly the allotment of fully paid shares of a nominal value of £1,075,000, and partly options to acquire further shares in these

companies to the nominal value of £1,247,500. The amount of money expended by the appellant to the date of the transfer of the shares in the Western Australian companies to the English companies in respect of acquiring and maintaining and, in some instances, developing these mining properties and incorporating the former companies was £119,251.1.10.

The admissions state that the appellant "kept two separate accounts in respect of its transactions with each English company called `Property Sale Account' and `Share Acquisition Account'. To the respective `Property Sale Accounts' were charged in respect of the shares in each Western Australian subsidiary company all expenditure which the company had made at any time up to the time of the sale thereof in connexion with the mining properties and in the incorporation of the subsidiary companies and on the credit side of the account were placed the cash consideration from and share consideration taken at par or market value in the English companies. To the respective `Share Acquisition Accounts' on the left hand side were placed the number of shares and options received as part of the consideration and in the money column was inserted the par or market value of the shares; no money value was put upon shares under option unless and until the options were exercised. All the shares received were fully accounted for; options however in some cases were not exercised but simply ceased to exist."

It is common ground that in acquiring these shares first in the Western Australian companies and then in the English companies, the appellant was engaged in the business of trading in shares.

Section 25(1) of the Act provides that the assessable income of a resident taxpayer shall include the gross income derived directly or indirectly from all sources whether in or out of Australia which is not exempt income. Section 23(q) provides that income derived by a resident taxpayer from sources out of Australia, where that income is not exempt from income tax in the country where it is derived, shall be income which is exempt from income tax.

The appellant was finally assessed upon a taxable income of £191,700. This sum includes a number of items which can be classified under four heads:

(1) The principal item is a profit of £150,168.18.4. It consists of three credits less a number of debits. The credits are £196,875, £9,516.1.8 and £62.10.0. In July 1936 the appellant acquired 550,000 shares of 5s each in the capital of one of the English companies, Commonwealth Mining & Finance Ltd These shares were allotted in settlement of the appellant's claims against this company under previous contracts by which this company agreed to allot shares to

the appellant in exchange for shares in some of the Western Australian companies. The appellant credited the relevant share acquisition account with the market value of these shares, namely 9s per share which, plus exchange, amounted to £196,875. During the year of income the appellant sold 200,000 of these shares at this market value to Kookaburra Investments Ltd for fully paid shares of £1 each in that company, and the remaining 150,000 shares at the same value for fully paid shares in Austmac Investments Ltd Kookaburra Investments Ltd and Austmac Investments Ltd were two subsidiary investment companies which the appellant had incorporated in England. No profit was therefore made upon the sale of shares in one English company to the other English companies. The profit was made upon the sale of shares in a Western Australian company to an English company. The credit of £9,516.1.8 resulted from an exchange of 124,496 shares in another of the seven English companies, Great Boulder Mining & Finance Co Ltd, for shares in Commonwealth Mining & Finance Ltd The credit of £62.10.0 was a profit made on the sale of shares in one of the Western Australian companies to another of the seven English companies, Anglo Australian Gold Development Ltd.

(2) The sum of £22,213.10.8. This credit resulted from dealings in shares in three further subsidiary companies, namely Lalla Rookh Gold Mines Ltd, Comet Gold Mines Ltd, and King of Creation Gold Mines Ltd These are three further companies which the appellant caused to be incorporated in Australia. During the year of income the appellant transferred some further mining properties which it had acquired in Western Australia to Lalla Rookh Gold Mines Ltd and Comet Gold Mines Ltd in exchange for fully paid shares. In each case the appellant entered in its books to the credit of an account styled "Capital Appreciation by Exchange of Assets Account", the amount by which the par value of these shares exceeded the amount which the appellant had expended in acquiring the properties. The appellant then sold these shares in England. It sold the shares in Lalla Rookh Gold Mines Ltd which it had acquired for £A42,000 to an English company, Meekatharra Gold Mines Ltd, for £E42,000, placing the difference in exchange, £10,500, to the credit of the capital appreciation account. It sold the shares in Comet Gold Mines Ltd which it had acquired for £A60,000 to a number of English companies for the same sum. It also sold some further mining properties to King of Creation Gold Mines Ltd for £A25,000 which it had acquired in Western Australia at a cost of £19,000. It credited an account styled "Capital Appreciation by Exchange of Assets" account with an amount of £5,498.6.1, being the difference between these two sums less other

expenses amounting to £A501.13.11. The appellant also subscribed for 40,000 shares of £1 each in the capital of this company, and sold these shares to another Australian company, Day Dawn Gold Mines Ltd, for £A40,000. The balance of profit from all these transactions after making a number of deductions was £22,213.10.8. The order of Rich J contains two declarations, Nos 4 and 5, relating to the transactions with Lalla Rookh Gold Mines Ltd and Comet Gold Mines Ltd They declare that the appellant made no profit out of the transfer of the mining properties to these companies in exchange for shares, and that there should be deducted from the profits derived from the transactions with the English companies in respect of the shares the sums expended by the appellant in acquiring the relevant mining properties, together with any incidental expenses.

(3) The balance of profit on two dealings classified in the appellant's books as operations outside Australia and described as "Share dealing £6,597.12.11" and "Mephan Ferguson £2,500". It appears from the admissions that the sum of £6,597.12.11 should be £6,285.2.11 and that this is the balance of profit which the appellant derived in the year of income from buying and selling in England other shares in the seven English companies after setting off losses due to the fall in the market value of shares which it held in other English companies. The appellant derived the profit shown as "Mephan Ferguson £2,500" by acquiring an option to purchase shares in a Victorian company known as Mephan Ferguson Pty Ltd for £E8,000 and selling this option to a further subsidiary company which it had incorporated in England for £E10,000. The sum of £2,500 represents the difference in Australian pounds between these two sums.

(4) The balance of profit and loss account on income earned in Western Australia, £8,184. The source of this profit is exclusively in Australia.

It is difficult to state the exact amount under the third and fourth heads. They are approximately the same and together constitute the difference between the addition of the amounts under the first two heads and the sum of £191,700.

This short statement is enough to show that the sum of £191,700 comprises income as to which there is an exclusively Australian source and an exclusively English source, and as to which there may be a dual source in Australia and England. There is no dispute that to the extent to which the source of the profit is in England it is income derived by the appellant which is not exempt from income tax within the meaning of s 23(q). There is also no dispute that where shares in the Western Australian companies were sold under contracts made in England for cash payable there or for shares in

English companies the profit was derived partly from a source in Australia and partly from a source in England. But there is a dispute whether profits made by the sale or other disposition of English shares in England acquired in exchange for shares in Western Australian companies have a dual or exclusively English source.

The method of bookkeeping adopted by the appellant (which the respondent appears to have accepted for the purposes of the assessment) was to credit the par or market value of the shares which it acquired in the seven English companies and to debit the amount which it had expended upon the mining properties sold to the Western Australian companies whose shares were acquired by the English companies. As and when the shares were allotted it credited the gain to an account in its books styled "Appreciation of Capital by Exchange of Assets Account". But it is not now disputed that the appellant was engaged in the business of trading in shares, so that this gain was not an increase of capital value but a trading profit. A profit can in some instances be attributed partly to the country where the property sold originates or is situate at the date of sale, and partly to its sale in another country. The shares in the Western Australian companies were locally situate in Western Australia. Rich J attributed a dual source to the profit made by the sale of these shares in England to the English companies, and against this finding there is no appeal. But Mr Kitto has submitted that a dual source must also be attributed to any profit made by the subsequent sale of the shares in the English companies. He contended that the exchange of shares in the Western Australian companies for shares in the English companies was all part of one profit-making scheme to sell the mining properties for cash in England, and that the formation of the companies in Western Australia and in England was mere machinery to effect this purpose. But there is, in my opinion, no sufficient evidence of such a connected purpose. The appellant was keeping its accounts on an annual basis. This was the proper course to adopt in order to comply with the Act. The question under the Act is "What is the income of the company in the particular year of assessment, and it must be answered by applying its relevant provisions as best they can be applied" 21 . It showed the shares in the English companies when allotted as a gain, and charged against this gain the expenses of acquiring the relevant mining leases, and subsequent expenses. The balance of gain, if any, was a profit from a dual source. It thus

acquired shares in English companies on English registers or, in other words, property situated in England. It was then in the same position with respect to these shares as any other person to whom shares in these companies had been allotted. Any profit from a sale of these shares in England would be derived exclusively from an English source.

It appears from the admissions that the General Commissioners for the City of London held that the appellant was carrying on a trade in the United Kingdom and was assessable on the profits arising from such trade. But they also held that the profits which were assessable were the profits received from the sale of the shares in the Western Australian companies to the English companies, and that in calculating such profits the par value of the Western Australian companies' shares must be deducted as the cost to the appellant of the purchase of such shares. It was then agreed that as a result of this finding the assessments fell to be discharged.

The appellant has therefore not been called upon to pay any income tax in England on profits derived either partly or exclusively from a source in the United Kingdom. But this does not mean that if there had been a balance it would not have been taxable. In determining whether there was a balance the Commissioners did not accept the method of bookkeeping adopted by the appellant, but held that they were bound to give effect to the legal results which ensure where a company agrees to allot fully paid shares as consideration for the purchase of an asset. In such a case the company gives up the right to call upon the allottee to pay an amount in cash equal to the par value of the shares and "the value at which the company is content to accept the property must be treated as its value as between itself and the shareholder, whose liability is discharged by its means" 22 "A payment is an effective payment in money's worth if the consideration given by way of payment is something which is bona fide regarded by the parties to the payment as fairly representing the sum which the payment is to discharge" 23 "When fully paid shares are properly issued for a consideration other than cash, the consideration moving from the company must be at the least equal in value to the par value of the shares, and must be based on an honest estimate by the Directors of the value of the assets acquired" 24 . The cost to the company is therefore the par value of the shares, and it would seem to follow

that the vendor must be taken prima facie to have received property of the same value. Accordingly, in British South Africa Co v Commissioner of Income Tax the vendor was credited with the par value of the shares for income tax purposes. This approach of the General Commissioners is entirely consistent with at least three decisions of the Court of Appeal 25 . If these cases are applicable, it cost the Western Australian companies over £3,000,000 to purchase the mining properties from the appellant. The Western Australian companies could not have lawfully agreed to allot their shares as fully paid unless the directors were bona fide of opinion that the mining properties were of this value. The appellant had up to this stage only spent £52,836.5.8 in acquiring and maintaining the mining properties and incorporating the Western Australian companies. After the companies had been incorporated the appellant continued to keep the same account of such expenditure and to charge it against the value of the shares in the English companies into which the shares in the Western Australian companies had been transmuted. This caused the amount to increase to £119,251.1.10. Upon the view taken by the General Commissioners, therefore, the appellant transferred shares of the value of over £3,000,000 to the English companies as consideration for the payment of £481,875 cash, the allotment of shares at par of the value of £1,075,000 and the grant of the options. The English companies could not have lawfully agreed to allot shares of this par value unless their directors bona fide believed the assets were worth this consideration. The shares in the Western Australian companies, so far as they were paid for by the allotment of shares in the English companies, cost the English companies at least £1,075,000, and the appellant must be taken prima facie to have parted with assets of at least the same value. If the shares in the Western Australian companies are to be accounted for at their par value, the English shares must have cost the appellant more than this amount. The General Commissioners must have reached this conclusion. They must have considered that there were in law three separate transactions: (1) the acquisition by the appellant of the mining properties; (2) the sale of these properties for shares in the Western Australian companies; and (3) the sale of shares in the Western Australian companies to the seven English companies. On this basis the profit was made when the appellant managed to acquire mining properties which rose in value to such an extent that the directors of

the Western Australian companies could bona fide believe that they were worth over £3,000,000.

The result of this approach is that the appellant made no balance of profit upon the sale of the Western Australian shares to the English companies, and that no English income tax became payable. The provision in s 25 of the Income Tax Assessment Act that the assessable income of a taxpayer shall include gross income which is not exempt income indicates that income is not exempt from tax in the country where it is derived within the meaning of s 23(q) if it is income subject to tax in that country, although it may escape tax in part or in whole because of the deductions allowable there 26 . In re-assessing the appellant for income tax the respondent must, therefore, treat any income derived wholly or partly from a source in England as exempt income and only assess the appellant upon income derived wholly or partly from a source in Australia.

I shall now proceed to discuss the grounds raised in the notice of appeal and cross-appeal. There is no appeal from the fourth, fifth and sixth declarations. The grounds of appeal are six in number. The first ground proposes that a certain declaration shall be substituted for the first declaration made by Rich J. His Honour declared "that the business and operations from which the appellant company derived its profit were carried out in part in Australia and in part in the United Kingdom, and that for the purposes of s 23(q) of the Income Tax Assessment Act 1936 the income of the company is derived in part from sources out of Australia". But it is clear that during the year of income the appellant made profits from sources exclusively in Australia and in England as well as from this dual source. It is therefore proposed that the following declaration shall be substituted:

"that the appellant company derived its profit from its business and operations partly from sources exclusively in Australia, partly from sources exclusively in the United Kingdom, and as to the remainder from a source partly in Australia and partly in the United Kingdom, and that for the purposes of s 23(q) of the Income Tax Assessment Act 1936 the profit of the company which was derived from sources out of Australia is exempt from tax in Australia if not exempt from tax in the United Kingdom."

The respondent does not object to this substitution. There is, as I have said, no dispute that any profits made out of the sale of the Western Australian shares to the English companies have a dual

source, and that these profits, to the extent to which they were derived from a source in the United Kingdom, are exempt income under s 23(q). I can therefore see no reason why this declaration should not be substituted for the present declaration.

The second declaration contains two sentences. The first sentence is "That in ascertaining the profits derived from the sale of the shares in the twenty-seven Western Australian subsidiary companies the value of the consideration paid in English shares should be brought into account, and for that purpose s 21 of the Income Tax Assessment Act 1936 is applicable". Neither party objected to this sentence, but there was considerable argument as to the application of s 21. This section provides that where, upon any transaction, any consideration is paid or given otherwise than in cash the money value of that consideration shall, for the purposes of the Act, be taken to have been paid or given. The sentence defines the manner in which part of the consideration received by the appellant as vendor from the English companies as purchasers is to be estimated. It declares in effect that the appellant must be deemed to have received as such consideration a sum equal to at least the par value of the English shares. It does not define the manner in which the value of the property sold by the appellant to the English companies is to be estimated. This is presumably because it seems to have been agreed between the parties that this is represented by the sum of £119,251.1.10. The assessment was made on this basis, and in this particular was not objected to. Section 190 of the Act limits the appellant to the grounds stated in the objections. This value is the foundation of the two declarations numbered 4 and 5 made by Rich J, and against these declarations there is no appeal. It accords, as I have said, with the appellant's books 27 .

The second sentence is as follows: "That the operations of the appellant amounted to the carrying on of a business for the purposes of s 28 and corresponding enactments, and that shares and options formed trading stock within the meaning of that section and of s 31 and corresponding previous enactments." Part III, Div 2, sub-div. B, of that Act, which relates to the opening and closing entries for trading stock, includes the carrying on of any business. The definition of "trading stock" in s 6 includes anything acquired or purchased for the purpose of sale or exchange, and is therefore wide enough to include any personal property acquired or purchased for these purposes. In Craddock v Zevo Finance Co Ltd

the Master of the Rolls said that shares should be regarded as the stock in trade of a company which is trading in shares. It is submitted by the author of Stroud's Judicial Dictionary that stock in trade comprises all such chattels as are acquired for the purpose of being sold or let on hire in a person's trade. Shares have been held to be goods, wares or merchandise 28 . Property in chattels personal may be either in possession or in action. Shares in a company are personal chattels which are not in possession and are therefore choses in action 29 . Section 29 refers to the value of livestock and each article of other trading stock. Section 31 refers to the value of each article of trading stock (not being livestock). An article can mean a separate thing, whether material or immaterial. The respondent does not object to the sentence because, in his opinion, it adds nothing to and subtracts nothing from the operation of the first sentence. I think that this is right. I am also inclined to think, without finally deciding the point, that shares are trading stock within the meaning of the sub-division. The sub-division in any event merely prescribes sound accountancy practice. I would therefore retain the second sentence.

The third declaration was made in answer to the question whether profits made from the realization of English shares or options over English shares received as part consideration for shares in the twenty-seven Western Australian subsidiary companies are liable to federal income tax where such shares or options were realized in Australia. His Honour declared that the profits made from the realization of shares in English companies and options over such shares received as part of the above consideration were derived partly from a source within Australia and partly from a source outside Australia, and the question what part is derived from these sources is a matter to be determined by the Commissioner, subject to review and appeal under the provisions of the Income Tax Assessment Act 1936. The declaration, unlike the question, is not limited to sales in Australia. The appellant now asks that the declaration should be so limited but this is not agreed to by the respondent. It is unfortunate that the appellant did not approach his Honour in order to ascertain whether, as appears probable, these words were omitted by accident. The declaration could then have been amended under the slip rule, O XXVII, r 9. I believe that his Honour must have intended that the declaration should coincide

with the question. I have already expressed the opinion that profits made by the appellant on the sale in England of shares in English companies are derived exclusively from a source in England. I would therefore amend the declaration by adding the words "in Australia".

Three further grounds of appeal remain to be considered. They are grounds 2, 6 and 7. Ground 2 is "That his Honour should have declared that the income derived by the appellant company in the tax year ended 31 October 1936 by trading in England in shares in English companies whether such shares were acquired in return for shares in the Australian companies or otherwise or in other property not situated in Australia was derived exclusively from a source in the United Kingdom and is not liable to income tax under the legislation of the Commonwealth if that income so derived is not exempt from income tax in England." Ground 6 is "That his Honour should have declared that the cost of the shares in the seven English companies acquired by the appellant company in return for shares in the 27 Western Australian companies was Nil." Ground 7 is "That his Honour was in error in making no order as to costs and that his Honour should have ordered the Commissioner of Taxation to pay the appellant company's costs of the appeal."

For the reasons already given, I agree with ground 2 as a general proposition. But I also consider that the declaration claimed is couched in too general terms and that any declaration that is made should have specific reference to the evidence. The income taxed by the respondent has already been classified under four heads. Of the items included in this classification I am of opinion that the sum of £9,516.1.8 under the first head and the items under the third head were derived exclusively from a source in England and are not exempt from income tax in England, and that the appellant is entitled to a declaration to this effect.

In support of the sixth ground it was said that the amount of money expended by the appellant in acquiring the shares and other consideration from the English companies was £119,251.1.10, and that since it had received from these companies a greater amount in cash namely £481,875, the £1,075,009 worth of shares must have cost it nothing. But I agree with the General Commissioners that there were in law three separate transactions. The cost to the appellant of the whole of the consideration received from the English companies was the value of the shares in the Western Australian companies. The shares in the English companies have been valued for the purposes of the assessment as fully paid shares. It must therefore be taken that these companies received from the appellant property which their directors could honestly, and not colourably, consider a fair equivalent for the release of the appellant from its obligations to

pay for the shares in cash. There is nothing on the face of the contract to show that the consideration was illusory or only of sufficient value to pay for the shares in part. If there was, or the facts were sufficiently plain, it might be proper to treat the shares as unpaid or only partly paid without setting the contracts aside 30 . But this could only be done in proceedings between the shareholder and the company, and the effect of doing so would be to destroy or reduce the value of the shares as a profit for income tax purposes. I would therefore refuse to make this declaration.

The seventh ground complains of his Honour's order as to costs. It is true that the appellant achieved a considerable success upon the appeal, and that in the exercise of his discretion another judge might have made an order in its favour. But his Honour exercised his discretion judicially. He evidently regarded the appeal as one of divided success. Other cases are not of much assistance as a guide to the exercise of a discretion in any particular case, but it is to be noted that, under similar circumstances in Re Crossman dec'd 31 , Finlay J made the same order. An appeal against this order was dismissed by the Court of Appeal in In re Crossman 32 which, however, allowed the appeal on the merits. The House of Lords in Inland Revenue Commissioners v Crossman 33 restored the order of Finlay J, including his order as to costs. In my opinion no sufficient ground exists for interference with the exercise of his Honour's discretion.

Of the grounds taken in the notice of cross-appeal, grounds (a), (b) and (d) were not pressed. The respondent applied to substitute the following paragraph for ground (c): That his Honour should have held that the assessable income of the taxpayer company to be apportioned for the purposes of s 23(q) of the Act was the difference between the cost to the taxpayer company of the shares in the Western Australian companies acquired by it plus expenditure in relation thereto incurred by it prior to the sale thereof and the total sum ascertained by adding to the cash portion of the considerations received for the sales of the shares in the twenty-seven Western Australian companies the money value, as at the respective dates of the said receipts of the shares rights and options forming the balance of the said considerations together with the profits mentioned in declaration 3 of the order herein.

Mr Weston did not object to a declaration in the form of this paragraph omitting the words italicized. For the reasons already given I am of opinion that if this declaration were to be made these words should be omitted.

Grounds (e) and (f) relate to that part of the order under appeal by which the assessment was set aside and a re-assessment ordered. It was contended that the Court has no power to set aside an assessment and that Rich J should have ordered that the assessment be remitted to the respondent for amendment. Section 199 provides that the Court hearing the appeal may make such order as it thinks fit and may by such order confirm, reduce, increase or vary the assessment. It was contended that the initial generality of the section is limited by its subsequent explicitness, so that the jurisdiction of the Court is confined to confirming, reducing, increasing or varying the assessment. A casual glance at the Commonwealth Law Reports is sufficient to show that orders setting aside assessments have been frequently made. The power conferred upon the Court to make such order as it thinks fit is expressed in the most general terms and is clearly intended, in my opinion, to bestow upon it the most ample authority to mould its order to meet the circumstances of any particular appeal.

It is plainly necessary to set the assessment aside where a taxpayer is not liable to be assessed at all. Where a taxpayer is liable to be assessed but is taxed on a wrong principle, it is usually convenient and often necessary to re-assess de novo. That involves a setting aside of the existing assessment expressly or by implication. It was suggested that such an order created a danger of a taxpayer escaping liability through lapse of time under s 170. I can discover no such danger. In any event there is an order for a re-assessment and that is an order of a superior court. Such an order, even where made without jurisdiction, is not void but voidable and is binding upon the parties until set aside 34 .

The section confers upon the Court certain specific powers. If it dismisses the appeal it can expressly confirm the assessment although the dismissal would have this effect without an express order. But the process of assessment is so complex that the cases would be rare in which the Court could itself reduce or increase the amount of an assessment. It would generally be necessary to remit the matter to the Commissioner in some form in order that he should calculate the correct amount. There is no authority to do so specifically conferred by the section. It is thus necessary to the

effective operation of the section that the general words should be given their full natural grammatical meaning. The objection that his Honour had no power to set aside the assessment therefore fails.

But the result of doing so is that there is at present no assessment, and the re-assessment will be a new assessment. Section 201 provides that the fact that an appeal is pending shall not in the meantime affect the assessment under appeal and the tax may be recovered as if no appeal were pending. The appellant did not pay the tax assessed when it became due and payable and thereby incurred an additional tax of ten per cent per annum on the amount unpaid under s 207. If the assessment is set aside, and there is a re-assessment, the appellant will escape this additional tax. It would of course only have to pay additional tax upon the proper amount for which it should have been originally assessed. It will probably be found that in all the previous cases where assessments have been set aside the appellant had paid the tax when it became due and payable, so that the setting aside of the assessment would not have relieved him from any proper liability. The circumstance that additional tax has been incurred is, I think, a reason for not setting aside the present assessment. His Honour's attention does not appear to have been called to this unusual feature of this appeal.

In my opinion the assessment should be remitted to the respondent for amendment conformably with the order of this Court, or his decision on the objections set aside and the objections remitted to him for re-consideration and re-determination conformably with such order. I agree with Mr Weston that the appellant should have a right of appeal against the ratio of apportionment made by the respondent where there is a dual source, but objection 19 appears to be wide enough to protect the appellant in this respect.

Each party has partly succeeded and partly failed and I would make no order as to costs of the appeal and cross-appeal.

Order varied as follows:

1. By substituting by consent the following declaration for the first declaration:

"that the appellant company derived its profit from its business and operations partly from sources exclusively in Australia, partly from sources exclusively in the United Kingdom, and as to the remainder from a source partly in Australia and partly in the United Kingdom, and that for the purposes of s 23(q) of the Income Tax Assessment Act 1936 the profit of the

company which was derived from sources out of Australia is exempt from tax in Australia if not exempt from tax in the United Kingdom."

2. By omitting in the second declaration the words from "That the operations" to the words "corresponding previous enactments" inclusive.

3. By inserting in the third declaration the words "in Australia" after the word "realization".

4. By adding the following declaration:

"7.(a) The income or gain alleged to have arisen from the exchange mentioned in par 26 of the admissions of fact (Ex. B), of 124,498 shares in Great Boulder Mining & Finance Ltd for the same number of shares in Commonwealth Mining & Finance Ltd.

(b) the income or gain arising from the surplus produced by the sale mentioned in par 34(i) of the said admissions of fact of shares in Commonwealth Mining & Finance Ltd and Great Boulder Mining & Finance Ltd were derived by the appellant company from sources out of Australia within the meaning of s 23(q)."

5. By substituting for the order that the assessment be set aside and that the matter be remitted to the Commissioner an order that the decision of the Commissioner upon the objections be set aside and that the objections be remitted to the Commissioner for re-consideration and re-determination conformably with this order.

Subject to the foregoing variations, order appealed from confirmed and appeal and cross-appeal dismissed.

Solicitors for the appellant, Wheatley & Son, Perth, by C Biggers.

Solicitor for the respondent, H F E Whitlam, Crown Solicitor for the Commonwealth.

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1 [1944] 1 All ER 566.
2 [1940] HCA 9; (1940) 63 CLR 382.
3 [1926] AC 424, at pp 431-432.
4 [1937] HCA 13; (1937) 57 CLR 36.
5 [1900] AC 588.
6 See Commissioners of Taxation (NSW) v Meeks [1915] HCA 34; (1915), 19 CLR 568; Mount Morgan Gold Mining Co Ltd v Commissioner of Income Tax (Q) [1923] HCA 37; (1923), 33 CLR 76; Dickson v Commissioner of Taxation (NSW) [1925] HCA 29; (1925), 36 CLR 489.
7 See, eg, Bennett (Inspector of Taxes) v Marshall, [1938] 1 KB 591.
8 cf Commissioner of Taxes (Q) v Burke [1926] HCA 21; (1926), 38 CLR 314; Perrott v Deputy Federal Commissioner of Taxation (NSW) [1925] HCA 8; (1925), 40 CLR 450; Federal Commissioner of Taxation v Thorogood (1927), 40 CLR 454.
9 [1940] HCA 9; (1940) 63 CLR 382.
10 [1921] 3 KB 583, at p 593.
11 cf Lovell & Christmas Ltd v Commissioner of Taxes (Vict), [1908] AC 46; Commissioner of Taxes (Vict) v British Australian Wool Realization Association Ltd, [1931] AC 234, at pp 254-255; Public Officer of Studebaker Corporation of Australasia Ltd v Commissioner of Taxation (NSW) [1921] HCA 13; (1921), 29 CLR 225; Commissioner of Taxation (WA) v D & W Murray Ltd [1929] HCA 21; (1929), 42 CLR 332.
12 Commissioners of Taxation (NSW) v Kirk, [1900] AC 588; Mount Morgan Gold Mining Co Ltd v Commissioner of Income Tax (Q) [1923] HCA 37; (1923), 33 CLR 76; Commissioner of Taxation (NSW) v Hillsdon Watt Ltd [1937] HCA 13; (1937), 57 CLR 36.
13 Associated Newspapers Ltd v Federal Commissioner of Taxation (1944), 69 CLR 257, at p 269; Federal Commissioner of Taxation v Henderson (1943), 68 CLR 29, at pp 39, 50; Federal Commissioner of Taxation v United Aircraft Corporation [1943] HCA 50; (1943), 68 CLR 525, at pp 529, 552; Robert Coldstream Partners v Federal Commissioner of Taxation [1943] HCA 33; (1943), 68 CLR 391, at p 400; Federal Commissioner of Taxation v Whiting [1943] HCA 45; (1942), 68 CLR 199, at p 209; New Zealand Flax Investments Ltd v Federal Commissioner of Taxation [1938] HCA 60; (1938), 61 CLR 179, at p 208; Gregory v Deputy Federal Commissioner of Taxation (WA) [1937] HCA 57; (1937), 57 CLR 774, at pp 778-779; Evans v Deputy Federal Commissioner of Taxation (SA) [1936] HCA 2; (1936), 55 CLR 80, at pp 103, 109; Jolly v Federal Commissioner of Taxation [1934] HCA 66; (1934), 50 CLR 131, at pp 151, 153; Federal Commissioner of Taxation v Standard Trust Ltd [1933] HCA 19; (1933), 49 CLR 609, at pp 622, 642; Stewart Dawson & Co (Vict) Pty Ltd v Federal Commissioner of Taxation [1933] HCA 4; (1933), 48 CLR 683, at p 692 (a land tax assessment); Smith v Federal Commissioner of Taxation [1932] HCA 44; (1932), 48 CLR 178, at p 191; Ruhamah Property Co Ltd v Federal Commissioner of Taxation [1932] HCA 42; (1932), 48 CLR 48, at p 56; Countess of Bective v Federal Commissioner of Taxation [1932] HCA 22; (1932), 47 CLR 417, at p 426; Kellow-Falkiner Pty Ltd v Federal Commissioner of Taxation (1928), 34 ALR 276, at p 281.
14 See, eg, the order of Rich J in Australian Mercantile Land & Finance Co Ltd v Federal Commissioner of Taxation (1929), 42 CLR 145, at p 154.
15 [1940] HCA 9; (1940) 63 CLR 382, at pp 431-432, 452, 470-472.
16 Levene v Inland Revenue Commissioners, [1928] UKHL 1; [1928] AC 217, at p 227.
17 [1895] 1 Ch 771, at pp 774-775.
18 [1944] 1 All ER 566.
19 (1944) 69 CLR, at p 262.
20 See Commissioner of Taxes (Vict) v Melbourne Trust Ltd, [1914] AC 1001, at p 1011; Federal Commissioner of Taxation v Standard Trust Ltd [1933] HCA 19; (1933), 49 CLR 609; cf Federal Commissioner of Taxation v Thorogood [1927] HCA 36; (1927), 40 CLR 454.
21 British South Africa Co v Commissioner of Income Tax, [1946] AC 62, at p 79.
22 In re Wragg Ltd, [1897] 1 Ch 796, at p 827.
23 In re White Star Line Ltd, [1938] Ch 458, at p 476.
24 Osborne (Inspector of Taxes) v Steel Barrel Co Ltd, [1942] 1 All ER 634, at p 638.
25 In re Wragg; Osborne (Inspector of Taxes) v Steel Barrel Co Ltd; Craddock v Zevo Finance Co Ltd, [1944] 1 All ER 566.
26 Texas Co (Australasia) Ltd v Federal Commissioner of Taxation [1940] HCA 9; (1940), 63 CLR 382.
27 Associated London Properties Ltd v Henriksen (Inspector of Taxes) (1944), 26 TC 46.
28 Evans v Davies, [1893] 2 Ch 216.
29 Colonial Bank v Whinney (1885), 30 Ch D 261; on appeal Colonial Bank v Whinney (1886), 11 AC 426.
30 Hong Kong & China Co Ltd v Glen, [1914] 1 Ch 527, at p 539; In re White Star Line Ltd, [1938] 1 Ch, at p 477.
31 (1934) 152 LT 98, at p 103.
32 [1935] 1 KB 26.
33 [1937] AC 26.
34 Cameron v Cole [1944] HCA 5; (1944), 68 CLR 571.