1993 PLP 323 (PTD)

The issue between the parties is whether the determinations, to use a neutral word, by the Commissioner for the years 1976 and 1977 that no tax was payable by the taxpayer constituted assessments for the purposes of section 25(1). If they did the Commissioner accepts that the later assessments were out of time and therefore ineffective. If they did not the later assessments were not time-barred. The determinations in question took the following form: (1) By what appears to be a printed form of letter the District Commissioner on 5th April, 1977 wrote to the taxpayer as follows: "Dear Your 1976 return of income has been checked. There is no refund, or further tax to pay. Yours faithfully..." Accompanying that letter was a document headed "Income Tax Assessment Notice 1976," with a fine drawn through the words. The document included the following entries: "Assessable income as returned $14,227.00 Loss b'fwd 973,237.38 Losses to be c'fwd 959,010.38 Balance of tax Nil" (2) On 6th March 1978 the District Commissioner sent to the taxpayer an undated letter relating to the 1977 return in terms identical to that which he had sent on 5th April, 1977, save that the second sentence began with the words "On the basis of the return furnished." Accompanying that letter was another document, dated 6th March 1978 and headed "Income Tax Assessment Notice 1977," with two lines drawn through the first three words. This document contained figures of assessable income, loss brought forward, loss available to be carried forward and a nil balance of tax. Mr. Kentridge for the taxpayer submitted that the word" assessment " meant the process of determining the income of a taxpayer, if any, of determining the allowable deductions or rebates and ascertaining thereby the balance of income, if any, upon which tax is payable. This process might show up a positive figure, a nil figure or a negative figure, but in each case an assessment had been made. Mr. Jenkin on the other hand adopted the reasoning of the Court of Appeal in arguing that an assessment only took place when the foregoing process threw up taxable income which is defined by section 2 as meaning "the residue of assessable income after deducting the amount of all special exemptions to which the taxpayer is entitled". If no figure of taxable income was produced by the process no assessment had taken place. Mr. Jenkin also relied on the terms of three further sections to which their Lordships will refer later. Section 9 requires a taxpayer to make a return even although he may well know that he will be required to pay no tax. The return required is of assessable income but such income is capable of producing nil taxable income by the deduction therefrom of special exemptions. Section 19 imposes on the Commissioner the duty to make assessments in respect of every taxpayer of the amount on which tax is payable. This involves, inter alia, calculating the assessable income. If, as Mr. Jenkin contended, the process of assessment has not taken place until some taxable income has been ascertained, it means that the Commissioner will not know until he has completed the whole exercise of examining the returns and relevant documents whether he has been making an assessment or not, even although he has in that process calculated the assessable income. If he has not been making an assessment what has he been doing and what is the statutory warrant therefor? Mr. Jenkin's contention also produced the somewhat curious result that a determination by the Commissioner that $5 lax is payable is an assessment which cannot be increased after the period specified in section 25(1) has run, whereas a determination that there is no taxable income or that there is a loss can be revised pat any time without limit. Some support for Mr. Kentridge's argument is to be found in section 23(2) which, in the context of amendment of assessment, uses the words "imposing any fresh liability or increasing any existing liability". The reference to fresh liability suggests that the section contemplated an alteration which imposed liability to tax where none existed before. Further support for the argument is to be found in section 29(1) which clearly contemplates that a notice of assessment given after an assessment has been made shall in certain circumstances contain a statement of the amount of tax to be refunded. In this situation the assessment would necessarily have produced the result that not only was no tax payable by the taxpayer but that tax was repayable to him by the Commissioner. If an assessment is made in such a situation it is difficult to see why it is not also made when no tax is payable without a refund. Mr. Jenkin however argued that the consideration of three sections, namely, 188(1), 38(2) and (3) and 21 showed that the taxpayer's argument was wrong. Sections 188(1) and (2) is in the following terms: "Losses incurred may be set off against future profits.

(1) For the purposes of this section any loss incurred by a taxpayer shall be ascetained in accordance with the provisions of this Act for the calculation of assessable income. (2) Any taxpayer who satisfies the Commissioner that he has, in any income year, incurred a loss shall, subject to this section, be entitled to claim that the loss be carried forward and deducted from or set off against the assessable income derived in the first income year after the income year in which the loss was incurred, so far as that income extends, and, so far as it cannot then be deducted or set off, be deducted from or set off against the assessable income derived in the next income year, and so on." It was as a result of the application of section 188(2) that the prior losses incurred by the taxpayer resulted in nil determinations in the years 1976 and 1977. Mr. Jenkin argued that the distinction between assessable income and taxable income was crucial to section 188(1). If section 188 had intended that a loss could be a subject of an assessment, the set off in subsection (2) would have been against taxable and not assessable income. Their Lordships consider that this argument is unsound and that in any event the terms of section 188 cannot assist in the proper construction of sections 19 and

25. It is purely fortuitous that the new determinations in this appeal arose as a result of the application of section 188; they could equally well have arisen because the taxpayer had made a loss in the year of assessment or because its assessable income had been exactly reduced to nil by the special exemptions. Mr. Jenkin next agued that section 38 contemplated that there could only be a year of assessment in relation to a taxpayer when he had taxable income. Section 38 so far as relevant for this argument is in the following terms: "(2) Subject to this Act, income-tax shall be payable by every person on all income derived by him during the year for which the tax is payable. (3) The year in which income is so derived is in this Act referred to as the income year, and the year for which income-tax is payable is in this Act referred to as the year of assessment." If income-tax were not payable by a taxpayer for a particular year then that year could not be a year of assessment and therefore no assessment had been made upon it. Their Lordships reject this argument. Section 9 requires the taxpayer to make a return of all income assessable or not "derived during the preceding year", and section 38(3) draws a distinction between the years in which income is derived and assessed. Income is derived in one year, which is the income year and the tax is assessed in another year, probably the following, which is the year of assessment. If in subsection (2) the words "during the year" etc. are read with "shall be payable" rather than with "income derived" the whole thing falls into place and the subsections cannot bear the construction which Mr. Jenkin seeks to place upon them. There can still be a year of assessment although the relevant income year produces no income upon which tax is payable. Finally Mr. Jenkin referred to section 21 which provides, inter alia: "If any person makes default in furnishing any return (the Commissioner) may make an assessment of the amount on which in his judgment tax ought to be levied and of the amount of that tax, and that person shall be liable to pay the tax so assessed, save in so far as he establishes on objection that the assessment is excessive or that he is not chargeable with tax." He submitted that the final eight words of the section showed that if a person had a nil tax liability no assessment should be made upon it. Their Lordships do not so construe these words. They appear to have been intended to cover a situation where a person was not a taxpayer at all within the definition of section 2 at the relevant time, e.g., because he had by then ceased to be an agent or trustee or had never been such, and not to cover the situation where an admitted taxpayer has a nil taxable income. Reference was also made to the Australian case, Batagol v. Commissioner of Taxation of the Commonwealth of Australia (1963) 109 C.L.R. 243 where there was a similar issue as to whether an assessment was time-barred. However, the wording of the statute under consideration was significantly different and their Lordships agree with Tompkins, J. that it is not of assistance in this case. Their Lordships have no doubt that the arguments for the taxpayer are to be preferred and that the Commissioner's statutory duties under section 19 in relation to a taxpayer's return extend not only to the production of a result which produces taxable income but also to results which produce a nil return or a loss. Any other construction would produce the anomalies and illogicalities already referred to. Whichever of these three results the Commissioner arrives at he had made an assessment for the purposes of section 19 and hence section

25. It is to be noted that the latter section uses the words "assessed for income-tax" that is to say "for all purposes of income tax" rather than "to income tax". Their Lordships cannot do better than quote the following passage from the judgment of Tompkins, J.: "In my opinion the expression `make assessments' in the context of section 17, means the process by which the Commissioner carries out his statutory obligation to ascertain the amount on which tax is payable and the amount of tax. I find nothing in the section, nor in the statutory scheme to justify a conclusion that the Commissioner only makes an assessment where he determines that there is tax payable. A conclusion that there is no amount on which tax is payable and that as a consequence there is no tax payable involves making an assessment from the returns and other information in his possession just as much as if the result of the assessment were to find that there was an amount on which tax was payable and consequently there was tax payable." (The reference is to section 17 of the Act of 1954 which was later replaced by section 19 of the Act of 1976). In reaching this conclusion their Lordships are fortified by two further considerations. In the first place the purpose of section 25(1) is to achieve finality and to enable the taxpayer and the Commissioner to close the books and dispose of their papers after the stipulated period. The exercise required to be carried out by the Commissioner in terms of section 19 is capable of producing three different results, namely, (1) that the taxpayer has taxable income, (2) that he has no taxable income, and (3) that he has a loss which he may carry forward in terms of section

188. To accept the argument of Mr.Jenkin and the reasoning of the Court of Appeal would mean that only in the first instance would finality be achieved whereas in the other two the Commissioner could reopen his determination at any time in the future. A result which would appear to be "contrary to the spirit of section 25," to quote the words of Cooke, J. in Commissioner of Inland Revenue v. V.H. Farnsworth Ltd. (1984) 1 N.Z.L.R. 428,

430. In the second place the provisions of Part III of the Act of 1976 headed "Objections to assessments" envisage that such objections will be dealt with by the Taxation Review Authority, a body particularly experienced in taxation matters. It would be entirely logical that the Legislature should have intended that all matters involving determinations by the Commissioner consequent upon receipt of a taxpayer's return as to tax payable or not payable should be dealt with by that body. Such a result would follow from the conclusions, which their Lordships have reached. If on the other hand MrJenkin's argument were correct it would mean that the determinations by the Commissioner resulting in a nil payment of tax or in a loss could only be challenged by a taxpayer in the ordinary Courts by judicial review or some other legal process. This would appear to defeat substantially the purpose of Part III. It only remains to refer to one further matter to which the Court of Appeal had some regard namely the amendment to section 19 occasioned by section 20 of the Income Tax Amendment Act, 1980. The amendment of section 19 required the Commissioner to make determinations of losses and provided that such determinations were to be treated as assessments. This amendment, it was said, reflected the common understanding in income-tax practice that a letter confirming the assessment of the amount of a loss to be carried forward under section 188 was not an assessment. It is noteworthy that the amendment does not deal with a situation where there is no loss but simply no taxable income. Had the construction of the relevant section of the Act of 1976 been in dubio it might have been appropriate to turn to the amendments for assistance. However, as their Lordships are of the opinion that the construction and intention of those sections are clear, it follows that that construction cannot be affected by the later amending Act. Their Lordships will therefore humbly advise Her Majesty that this appeal should be allowed, the order of the Court of Appeal set aside and the order of Tompkins, J. restored. The Commissioner must pay the taxpayer's costs in the Court of Appeal and before their Lordships' Board. M.B.Q./1927/T Appeal allowed.