TMI Blog1914 (7) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... evious years within the meaning of section 9 of act No. 1819 so as to subject the new i.e., the respondent company to income tax in respect thereof ? (2) Whether the difference of 509 1s. between the prices of debenture stock and par mentioned in paragraphs 19 and 22 of this case is profits of the kind mentioned in question (1)? The Supreme Court, by a majority of two to one, decided in favour of the Commissioner of Taxes, answering the questions put as follows : (1) The surplus of 104,782 1s. 4d. mentioned in paragraphs 19 and 22 of the said case is profits earned in or derived in or from Victoria by a company during the year 1909 or previous years within the meaning of section 9 of act No. 1819 so as to subject the company to income tax in respect thereof? (2) The difference of 509 1s. between the prices of debenture stock and par mentioned in paragraphs 19 and 22 of the said case is also profits of the kind above mentioned so as to subject the company to income tax in respect thereof. An appeal was taken to the High Court of Australia, and that Court by a majority of two to one reversed the judgment of the Supreme Court of Victoria, and in lieu of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he whole of the life of these companies the shares and debenture stock were transferable, and some of the stock and shares were in fact but to an extent not accurately known transferred. By the year 1903 the whole of the debenture stocks had been redeemed. In 1903 the respondent company was formed. The object of the company was to acquire the undertakings of the three separate companies in terms of agreements which had been made by the promoters of the respondent company with the three companies. In terms of these agreements the whole of the assets of the three respective companies were to be handed over to the new company; the three companies were to be wound up, and the shareholders of the respective companies were in exchange for their shares to receive, in the case of the Melbourne Assets Company and the English and Australian Assets Company, cash, debenture stock, and shares; in the case of the Federal Assets Company, debenture stock and shares, all calculated at the rates set out, in the said agreements. This was done. The respondent company then proceeded with the gradual realization of the massed assets, and applied various sums of the moneys so received in paying off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock having been paid off and the share capital of the company, without taking into consideration the Realization Reserve Account, being fully represented by assets, the directors also recommend to the shareholders that a distribution by way of bonus of sixpence per share should be paid in cash out of that account. s. d. The sum at credit of the Realization Reserve Account is . . . 148,708 15 2 The bonus now recommended amounts to . . . 34,166 13 0 Leaving at the credit of the Realization Reserve Account . . . 114,542 2 2 It is set forth in the special case that the assets of the three respective companies as taken over were entered at a valuation in the companies' books which reproduced a valuation made by the companies themselves four years before the transfer to the new company. As an individual asset came to be realized the difference between the actual price realized and the figure at which that asset stood was if it were a gain carried to a realization reserve account. It is also set forth that of the sum of 148,708 15s. 2d. mentioned in paragraph 7 of the report as above set forth, the sum of 104,782 1s. 4d. represents surplus on realization of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l interest in the proceeds of the massed assets which were originally assets of the three banks, but now are assets of the company. Holding, then, that the shareholders of this company are shareholders in an ordinary venture, the only question that remains is whether the surpluses realized represent profits. Their Lordships think that the principle is correctly stated in the Scottish case quoted, California Copper Syndicate v. Harris [1904] 6 F. 894 = 5 Tax Cases 159. It is quite a well settled principle in dealing with questions of assessment to income tax that where the owner of an ordinary investment chooses to realize it, and obtains a greater price for it than that for which he originally acquired it the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 and is therefore not assessable to income tax. But it is equally well established that enhanced values obtained from realization or conversion of securities may be so assessable where what is done is not merely a realization or change of investment, but is an act done in what is truly the carrying on, or carrying out, of a business. In the present case the whole object of the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the question during the year 1909 or preceding year rather precludes it but it has been very earnestly pressed upon their Lordships' attention. As regards the question of when a profit is earned their Lordships' view is that a profit can be said to be earned when it is dealt with as a profit. In ordinary cases this synchronises with the realization of the sums which swell the assets of the person or company, and which entering the account (whether on the creditor or debtor side will depend on the particular account in view) go to bring out the balance which is deemed profit. But for the reasons already given their Lordships think that in a case like this the company are entitled to hold at least a part of their realizations in suspense as indeed they have done in their accounts and that it is only when finally the same is given to the shareholders that the final impress of profit is, so to speak, stamped upon it, and therefore, for the purpose of the Act, that is the time at which it is earned. Holding this view their Lordships will humbly advise His Majesty to allow the appeal and set aside the judgment appealed against, and also the judgment originally passed by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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