North Australian Cement Ltd v Federal Commissioner of Taxation [1969] HCA 33; (1969) 119 CLR 353 (6 August 1969)

HIGH COURT OF AUSTRALIA

NORTH AUSTRALIAN CEMENT LTD. v. FEDERAL COMMISSIONER OF TAXATION [1969] HCA 33; (1969) 119 CLR 353

Income Tax

High Court of Australia

Menzies J.(1)

CATCHWORDS

Income Tax - Deduction - Mining - "Mining operations upon a mining property" - Limestone won by open cut working - Process of drilling, blasting and crushing at site - Taken from open cut for cement manufacture - Expenditure of capital money - Income Tax Assessment Act 1936-1967 (Cth), s. 122 (1)*.

Income Tax - Appeal from assessment - Objection to assessment - Expenditure claimed to justify deduction under specified section of Act - Objection against disallowing deduction under that section disallowed - At hearing of appeal deduction claimed under a different section requiring different findings of fact and determination of questions not raised by objection before the Commissioner - Taxpayer limited to grounds stated in notice of objection - Income Tax Assessment Act 1936-1967 (Cth), s. 190*.

HEARING

Brisbane, 1969, May 30; June 2;

Sydney, 1969, August 6. 6:8:1969

APPEAL under s. 187 of the Income Tax Assessment Act 1936- 1967 (Cth).

DECISION

August 6.

MENZIES J. delivered the following written judgment:-

In its return of income for the year ended 30th June 1967, the taxpayer made Assessment Act (1936-1967):

"Claim under Section 122

Balance to be recouped for Mining

Development

at 30.6.1966 36,307.80

(See Note 1 below)

Add

Coral Exploration (See Note 2 below) during

year ended 30th June, 1967 13,528.35

----------

49,836.15

Claim under Section 122 1/25th 1,993.45

----------

Balance to be recouped at 30.6.1967 $47,842.70

----------

The estimated life of mine at 30th June 1967

was 25 years.

Note 1 - During the year ended 30th June

1964 the company expended $36,307.80

(18,153 pounds 18s.) on exploratory drilling on the

mining property and a claim under Section

88 (2) was made in the company's income

tax return for that year as regards to that

expenditure. The claim was disallowed as the

company's mineral leases were viewed as

'mining leases' for the purpose of income tax.

The application of Division 10 of the Income

Tax Assessment Act to this expenditure was

requested in a letter to your Department dated

February 1966.

The company had appealed to the High Court

of Australia as regards the application of

Division 10 to certain expenditure incurred

during the year ended 30th June 1965, and this

expenditure was allowed as a deduction under

Division 10 without the necessity of having the

appeal heard by the Court.

In view of this the provisions of Section 122

have been applied to the balance to be recouped

at 30th June 1966 of the 36,307.80 pounds mining

development costs incurred during the year

ended 30th June 1964.

Note 2 - During the year the company carried

out exploration for an alternate source of

supply for the main ingredient (calcium

carbonate) for the manufacture of cement.

Permits were obtained from the Queensland

Mines Department for the company to carry

out exploration offshore for workable deposits

of calcium carbonate in the form of 'coral

sand'.

The exploration was carried out in excess of

10 miles from shore and was outside the

jurisdiction of Harbours and Marine

Department.

Claim under Section 122A

Additions to mining plant

Automatic Lubrication NCK

Shovel 1,242 -

Tachometer for Albion Truck 241 -

Installation of 5 T Hoist at Crusher 2,069 -

Dieseline Dispenser and Trailer 355 -

D 8 Wheel Puller 1,329 -

Impact Wrench 330 -

------- ------------------

5,566 pounds. - "

------------------

(at p356)

2. These claims the Commissioner disallowed. The taxpayer thereupon objected by a notice, in an argumentative form, in which nineteen grounds of objection were taken in relation to the deductions claimed as aforesaid. These objections amounted to this: that the taxpayer in connexion with the carrying on by it of mining operations for limestone upon a mining property at Calcium in Queensland and for the purpose of gaining assessable income it incurred the unrecouped expenditure of 36,307.80 pounds on exploratory drilling upon its mining property which did develop that property. The claim for the balance of the claim under s. 122, viz. 13,528.35 pounds, was claimed to have been expended on coral exploration during the year ended 30th June 1967. Although this was claimed under s. 122 it became apparent in the course of the hearing of the appeal that the only claim could be under s. 123AA as expenditure on exploration of a mining tenement. The remaining claims for $5,556 for additions to mining plant were made under s. 122A and this part of the deduction claimed falls to be determined primarily according to the same considerations that relate to the first claim, that the taxpayer's property at Calcium is a mining property on which it does carry on mining operations. If this were to be determined in favour of the taxpayer it would be necessary to consider further whether each item of plant in respect of which the claim is made was plant necessary for the mining operations. (at p356)

3. It should be observed that in the notice of objection the taxpayer did state, in relation to the expenditure of 36,307.80 pounds on exploratory drilling of Calcium, of the 13,528.35 pounds expended on coral exploration, that "further details regarding these expenditures has been indicated to the Income Tax Department in the company's income tax return for the year ended 30th June 1967". It is partly on account of this that I have quoted the relevant extract from the taxpayer's return. (at p356)

4. The first question for determination is whether the taxpayer's operations at Calcium were mining operations upon a mining property for the purposes of s. 122 of the Act. Consideration of this question requires, in the first place, some statement both of the character of the so-called "mining property" and of the operations carried on there by the taxpayer. (at p357)

5. As its name indicates, the taxpayer is a manufacturer of cement. Its cement works are at Stuart, about five miles to the south of Townsville. The limestone necessary for cement making at these works is won at Calcium about thirty miles to the south. There the taxpayer holds a special mining lease - No. 75 - dated 2nd June 1960. Presumably, this lease followed an earlier lease of like character. The lease was granted under the provisions of The Mining Acts and The Mining on Private Lands Acts of Queensland. The lease is a grant of about nine hundred acres for the purpose of mining for limestone. At Calcium the taxpayer frees limestone from the ground by open cut methods; breaks it up further as necessary; carries it to a crusher to be crushed to pieces minus five inches in size; the broken up material is carried by truck from the taxpayer's property to the railway head; thence it is carried by rail to Stuart. These operations will be referred to in greater detail later. (at p357)

6. There are scattered upon the area covered by the lease seven deposits of limestone, two of which extend beyond the boundaries of the lease. These deposits, it seems, were once coral atolls and were thrown up by volcanic action. There is little over-burden in some places but once this has been removed the limestone is readily available for recovery by open cut working. (at p357)

7. The existence of the limestone deposits was known as early as 1890 and the deposit now known as deposit No. 1 - which is the only deposit from which limestone has, in fact, been recovered - was originally worked by a family named Ryan who recovered and burnt limestone there. The workings were known as Ryan's quarry. In 1930 a geologist from the Mines Department studied deposit No. 1 and published a paper upon it. A further study of the same deposit, and a study of what is now known as deposit No. 2, was made by geologists from Mount Isa Mines Limited in 1948-1949 and a report was made to the taxpayer. Deposits known as Nos. 3, 4, 5, 6 and 7 were surveyed by an officer from the Geological Survey Office at Charters Towers between 1955 and 1960 and a report, which was produced, was sent to the taxpayer. I do not think I have the precise date on which the taxpayer took over the area from the Ryan family, nor the date on which it commenced its operations, but it is of no great importance and seemingly it was around about 1950. (at p358)

8. At this point it is convenient to state a little more elaborately the nature of the operations carried on at Calcium. (at p358)

9. The method of winning the limestone at Calcium falls neatly into several main stages. At first exploratory drilling is done to determine the depth and quality of the deposits. A long drill of 150'-200' is used for this. Air is fed under pressure to clear the hole and blow samples on to the ground for testing. After ascertaining the depth and quality of the limestone a model is constructed to enable the planning of the working of the deposits. To enable the winning of the actual limestone the overburden is removed. Holes are then drilled for blasting, charged with explosives and blown. When the explosives are blown fragments as large as fifty tons, but usually smaller, are dislodged. The larger of these pieces must be worked upon to reduce their size further. This is done by further drilling and blasting or by blasting directly by the use of plaster shots attached to the outside of the stone mass. Eventually it is broken down to a size which a mechanical shovel can handle and that is a piece up to 1 1/2 cubic yards of volume. Once the stone is down to shovel size it is loaded by the shovel on to trucks and taken to the crusher adjacent to the workings. There it is put through what is known as a jaw crusher which reduces it to five inches size and it is taken in that state from the lease to the railhead at Calcium by truck, and thence, by rail to the cement works at Stuart. (at p358)

10. I can now come to the application of s. 122 of the Act to the particular circumstances as disclosed by the evidence. (at p358)

11. In the first place, I am satisfied that the expenditure in 1964 which gave rise to the item "Balance to be recouped for mining development at 30.6.1966 - $36,307.80" was capital expenditure. Furthermore, not only was it incurred in connexion with the recovery of limestone for the purpose of producing assessable income, but it was to define deposit No. 1 and facilitate the future removal of limestone therefrom by open cut methods. Accordingly, if the lease is properly to be described as a "mining property" that expenditure did develop that property. The expenditure was, therefore, within s. 122 if the removal of limestone by the taxpayer is a mining operation upon a mining property. Furthermore, the property is a mining property if some of the operations carried on there are mining operations, even if it should appear that some of the operations carried on on the property fall outside the description of mining operations. Is then the recovery of limestone by open cut methods properly to be regarded as a mining operation for the purposes of the section? (at p359)

12. The following considerations are, I think, of some significance:

1. The property is held under a special mining lease. Work

thereon is subject to the provisions of the Mining Acts

and an officer called a "mine manager" is employed.

2. Limestone is a non-metallic mineral which, although

widespread

in the crust of the earth, is found in well defined

workable concentrations or deposits. The taxpayer's

property is a place where there are such deposits.

3. Although in Australia limestone is recovered by surface

workings and not by underground workings, it does appear

that in other parts of the world there are underground

workings for limestone, although these are usually in

conjunction with surface workings. Higher quality

limestone

is mined underground to enrich lower quality

limestone

obtained from the surface workings.

4. In Australia limestone workings are commonly called

quarries. The working now claimed to be a mine, i.e., the

excavation of No. 1 deposit, was originally known as

Ryan's quarry and, although sometimes referred to as a

mine, it has been generally described as a quarry, even by

the taxpayer.

5. The taxpayer's operations are of the same character as

those used to obtain coal, bauxite, copper, uranium,

iron-ore, gypsum, marble and bluestone by open cut

methods.

6. Witnesses, such as engineers, metallurgists and others,

concerned with the extraction of minerals from the earth,

do regard operations such as those carried on by the

taxpayer

as mining, although there is no common reason for

so doing. Those witnesses, who distinguish between mining

and quarrying, find the basis for doing so by reference to

the use to be made of what is extracted. Thus, in the

opinion of such witnesses, the extraction of limestone

for cement making is mining, whereas the extraction of

limestone for road making is not. (at p359)

13. Upon the whole, I think three possibilities must be considered. The first is the simple stand that the extraction of part of the crust of the earth by open cut methods is mining regardless of the character of what is extracted or the use to be made of it. This stand was taken by the witness David Rowlands, a senior lecturer in Mining Engineering in the University of Queensland. The following questions and answers demonstrate his position quite clearly:

"What is your point of distinction between an open cut

mine such as Mary Kathleen where they get out an ore from

which they extract uranium and a quarry like the one on

Mount Coot-tha where they get out road metal? . . . There

is no distinction from the mining point of view.

. . . .

In your definitions are you influenced at all by the various

statutory definitions we have in the Mining Acts of what are

minerals or what are not, or are you approaching it from the

chemical composition of the stuff? . . . From a mining

engineering point of view - I am not interested in it chemically

- but the actual excavations, the mining operation.

You are on the recovery? . . . Yes, as a mining engineer.

If you are going to drive a tunnel through a mountain for

road purposes and you are going to use the rock for

roadworks

as well? . . . It is an excavation, a mining operation." (at p360)

14. It seems to me that this simple and straight-forward solution, from the point of view of a mining engineer, is not open to me because of the decision of the Court in N.S.W. Associated Blue Metal Quarries Ltd. v. Federal Commissioner of Taxation [1955] HCA 23; (1956) 94 CLR 509 that the recovery of road metal by open cut methods is not mining for the purposes of the statutory provisions in question. (at p360)

15. The second possibility is to adopt, what seems to me, a more complicated solution, that open cut extraction is mining or not mining according to the use to be made of what is extracted. This was supported by the evidence of a number of witnesses. The witness Francis Aylmer, the works manager of the taxpayer, said:

"The expression 'quarrying' is used in some of the

documents:

is there any relevant difference between quarrying

and mining? . . . Yes: I have always thought that you

were mining when you were winning a mineral which had a

useful commercial value because of its chemical composition

or possibly physical properties; but with a definite chemical

compound for a further purpose.

HIS HONOUR: What sort of further purpose? . . . This

would be where you were either going to extract a metal

from it or convert it to some other form.

Suppose you were going to burn coal in your stove? . . .

I might not consider this to be mining.

MR. CONNOLLY: What about quarrying? . . . Quarrying;

again would be an operation, I think, where you are winning

stone for purely engineering purposes, for building construction

and the like where it was not going to be subjected to any

further processing."

The witness Julius Kruttschnitt, a distinguished mining engineer, former managing director and chairman of directors of Mount Isa Mines Limited and the former chairman of the taxpayer, gave evidence as follows:

"Do you regard the operations that occur at Calcium as

mining operation? . . . Yes I do.

What in your view is the true nature of mining? What

does 'mining' mean? . . . To me it means an excavation

whether on the surface or underground to obtain some mineral

that has an economic value.

Do you distinguish it from quarrying? . . . Well, in the

method of operation there is not much difference between an

open-cut mine and an ordinary quarry. It is just a matter of

nomenclature.

Is limestone a mineral? . . . It is a non-metallic mineral.

What is a non-metallic mineral? . . . As distinguished from

a metallic mineral it means the mineral has a metallic lustre

and a non-metallic mineral has a dull lustre which is not a

metallic lustre.

How would you compare the operation of winning

limestone

with that of winning bluestone for road work? . . .

It is done the same way as far as the blasting is concerned but

it is used for a different purpose. Limestone does not stay as

limestone in producing cement; it is a raw product. The

manner of winning limestone would be the same as winning

bluemetal but its use is quite different because it changes

physically and chemically and it eventually becomes the

principal component of cement."

The witness Edward Bennett, a geologist and manager of the Carpentaria Exploration Company, a subsidiary of Mount Isa Mines Limited, described the taxpayer's operations as mining:

"How can limestone once obtained be employed? . . .

There are two forms. One, it can just be used as a rock where

nothing is done to it chemically or physically or in any other

way except to grind it and use it for road capping, or for

agricultural limestone. The other form is to physically or

chemically treat it to produce an end product different from

the virgin rock as it occurs. To clarify something you said,

agricultural limestone may be powdered and ground down?

. . . Yes.

It is in a sense different from the virgin rock if you do that?

. . . No. It is still calcium carbonate as there is no change

there.

In determining whether the procedure in the winning of

it is a mining operation, do you draw any distinction between

these two broad categories of use? . . . Yes. In the mining

game, as it were, generally anything that has to do with mining

has generally some treatment at a later date. Mining in a

strict sense of the word - for instance, with the limestone,

if it were first quarried and used as road metal it would be

loosely termed quarrying, even though it is a mining operation

as I understand it in the profession. But once you use that

as a raw material for some sort of processing at a later date

it is invariably considered as a mining operation.

Do you see anything critical about the use of the words

'quarry' and 'quarrying' as against 'mine' and 'mining'

in the nature of the operation? . . . Quarrying these days

relates more to products which are mined, but there is no

further treatment of them, they are just used as is, the rock

is not altered in any way, it may be ground but not altered,

whereas the mining side of this operation has a process that

goes on later on."

The witness Carl Hoffmann, a metallurgist employed by Mount Isa Mines Limited, described the taxpayer's operations at Calcium as mining and said "you only mine something which you are later going to process" and described "processing" as involving "some physico-chemical process to extract the valuable content of the ore that you have mined", although in the witness' later evidence there were the following questions and answers:

"Does the fact that you get a particularly valuable product,

or a valuable product, have importance in your view? . . .

Well, there is an economic basis for going through the whole

operation. Certainly you only mine something that you can

turn into a valuable product.

But the recovery of stone to be used for road metal, because

it has some value and the person who recovers it gets paid for

it, makes the recovery of the metal for road works mining,

would it? . . . I would think so." (at p362)

16. Although I would not deny some value to the test propounded by the foregoing witnesses, I cannot regard it as decisive. I have no doubt that workings for diamonds or opals are "mining", although cutting the stones for use involves no change in their constitution or character. Furthermore, if the recovery of limestone for cement making is mining, so, I think, must be the recovery of limestone for grinding for agricultural purposes or crushing for road-making purposes. I think that coal is mined however it may subsequently be used, whether to burn in a stove or for the manufacture of gas or chemicals. I cannot accept the thesis that the use of what is extracted from the earth finally determines whether the extraction from the earth by open cut methods is to be called mining or something else. (at p362)

17. The third possibility is that whether an open cut extraction of material is mining or not is something to be determined by an informed general usage which takes into account both the way in which the deposits of the material occur, the character of the material to be recovered and the use to which it may reasonably be put. This is, I think, what is indicated by N.S.W. Associated Blue-Metal Quarries Ltd. v. Federal Commissioner of Taxation [1956] HCA 80; (1956) 94 CLR 509 . The conclusion is largely one of fact. (at p363)

18. Upon the whole, I have come to the conclusion that there is not sufficient here for me to arrive at a different decision from that reached by the Court in N.S.W. Associated Blue-Metal Quarries Ltd. v. Federal Commissioner of Taxation [1956] HCA 80; (1956) 94 CLR 509 . The fact that I have evidence that limestone is mined underground in some places outside Australia, whereas there was no such evidence in that case relating to bluestone, is not, I think, enough; nor is it enough that the limestone taken by the taxpayer is used in the further process of cement making. The operations of the taxpayer at Calcium are just the same as those described by Kitto J. (1956) 94 CLR, at pp 513, 514 and at the end I am in just the same position as was Kitto J. when he said:

"I do not go so far as to say that a view favourable to

the appellant in this case could not reasonably be held. But in

the end the conclusion must depend on one's own

understanding

of the sense in which words are currently used, and,

although Dr. Johnson in his day defined a 'quarry' as a

'stone mine' (see

(1889) 15 App Cas 19, at p 31

), it seems to me an unnatural and inapt

use of language to apply the term 'mining operations' to the

getting of stone such as blue-metal by open excavation, and

to call the land on which those activities are conducted 'a

mining property'"

(1956) 94 CLR, at p 514

.

This I adopt mutatis mutandis. The judgment of the Full Court affirming Kitto J. does support the application of a pragmatic test, i.e. that in Australia to speak of limestone workings as a mining property, even if technically justifiable, would be outside common usage and would "sound odd and incongruous". This conclusion disposes of the case so far as it relates to the claim under s. 222 in respect of $36,307.80 and that under s. 122A for $5,566. I should, however, say that had I come to the conclusion that the taxpayer was conducting mining operations upon a mining property, I would have found that the various items of plant referred to in the claim for a deduction under s. 124A were necessary plant, except for the tachometer for the Albion truck - $241. (at p363)

19. I am left then with the claim in respect of the sum of $13,528.35 in respect of coral exploration. This, as I have said, was not itself claimed as a deduction but it was claimed that it should be added to the balance to be recouped at 30th June 1966 to produce a balance of $49,836.15 to be recouped as at the year ended 30th June 1967 and so justify a claim for a deduction under s. 122 of $1,993.45. The objection was against the disallowance of this claim and the grounds taken in the notice of objection related to it. Mr. Connolly did not persist with this at the hearing and preferred to support a claim under s. 123AA for a deduction of expenditure incurred in the year ended 30th June 1967. (at p364)

20. It seems to me that to bring the claim within s. 123AA would require findings entirely different from the findings that would support the deduction as claimed and support it in a notice of objection. The purpose of s. 190 of the Act, read with ss. 185-187, is, no doubt, to ensure that the Commissioner, in allowing or disallowing objections which have been made, will have before him the matters upon which the objections depend and that, in the event of a reference or appeal, the Board of Review or the Court will not go outside the essential matters brought to the attention of the Commissioner for his consideration. In this case the Commissioner did not have before him the matters upon which the allowance under s. 123AA would have depended and, in my opinion, s. 190 precludes the taxpayer's reliance upon those matters as justifying a deduction by virtue of s. 123AA. The deduction to which the taxpayer would be entitled under s. 123AA is an altogether different deduction to that claimed and covered by the notice of objection. (at p364)

21. In these circumstances I refrain from expressing an opinion whether the taxpayer could have successfully framed a claim for a deduction under s. 123AA. (at p364)

22. In my opinion, therefore, the appeal should be dismissed. (at p364)

ORDER

Appeal dismissed with costs.