Carpenters Investment Trading Co Ltd v Commissioner of Taxation [1949] HCA 32

High Court of Australia Latham C.J. Dixon, Williams and Webb JJ. Carpenters Investment Trading Co Ltd v Commissioner of Taxation [1949] HCA 32

ORDER Questions answered as follows:—

(1) No.

(2) The Commissioner of Taxation, in ascertaining the amount of taxable profit should have deducted the sum of £816 in lieu of the sum of £568. Case remitted to McTiernan J. Costs of case to be costs in the appeal.

The following judgment of the Court was delivered by Latham C.J.

Latham C.J. Dixon, Williams and Webb JJ.

This is a case stated by McTiernan J. in an appeal from an amended assessment of the appellant company to war-time (company) tax under the War-time (Company) Tax Assessment Act 1940-1944 in respect of the excess above the percentage standard of the taxable profit derived during the year ended 30th June 1945: see the Act, s. 13.

The material facts, shortly stated, are that the appellant is a holding company within the meaning of s. 3 of the Act and that under s. 17 of the Act the company elected to have a subsidiary company, Cittco Pty. Ltd., treated as a branch of the holding company.

Included in the income derived by the appellant during the relevant year for the purposes of ordinary Federal income tax were dividends received from the Cittco company amounting to £2,250, and from other companies amounting to £816.

In our opinion, it is clear that when Cittco became, for the purposes of the War-time (Company) Tax Assessment Act, a branch of the appellant by reason of the election made under s. 17 of the Act, the dividends received from Cittco could no longer be included in the income of the appellant for the purposes of that Act, because a company cannot be paid a dividend by one of its branches.

The election by the appellant to have Cittco treated as one of its branches meant that the business carried on by Cittco became, for the purposes of the Act, part of the business of the appellant and the net profit of Cittco became part of the net profit of the appellant.

The arithmetical result of the method of assessment adopted by the commissioner for the purposes of the Act was to exclude from the taxable income of the appellant company the dividends received from Cittco and to substitute the net profit for the amount of the dividends. But the commissioner also sought to charge against the sum of £816, that is, against the dividends received from other companies, a sum of £248, being a portion of the "indirect" general expenses of the business of the appellant, and, therefore, to deduct from the taxable profit ascertained in accordance with s. 3 (b) of the Act (definition of "taxable profit") not the whole sum of £816, but this sum less £248, that is to say, a deduction of only £568.

The question whether the appellant is entitled to a deduction of the former amount, that is, of £816, is the real and sole outstanding question between the parties. On this point we are of the opinion that the appellant is right.

Section 24 of the Act provides, so far as is material, that the capital employed in any accounting period shall, for the purposes of the Act, be ascertained by adding certain items and deducting certain items, including "any capital, averaged over the accounting period, invested in shareholdings in any other company."

The scheme of the Act is, therefore, to eliminate as part of the capital of a company employed in any accounting period all capital invested in shareholdings in any other companies. This fact indicates that par. (b) of the definition of taxable profit in s. 3 of the Act should be construed in the same manner as a similar provision in s. 16 (d) of the Income Tax Assessment Act 1922-1927 was construed by this Court in the case of Douglass v. Federal Commissioner of Taxation [1] that is to say, to use the words of our brother Dixon in that case: "The word "included" should be treated as referring to the amount by which the taxable income is increased by reason of the presence of the dividends in the assessable income."

1. (1931) 45 C.L.R., at p. 106.

For these reasons, we are of opinion that the questions asked should be answered as follows:—

(1) No. (2) The Commissioner of Taxation, in ascertaining the amount of taxable profit should have deducted the sum of £816 in lieu of the sum of £568.

The case is remitted, with these answers, to McTiernan J. The costs of the case are to be costs in the appeal.