Revenue and Tax Law
| Published date | 01 December 2011 |
| Author | TAN Kay Kheng LLB (Hons) (National University of Singapore), CDipAF (Association of Chartered Certified Accountants), MAcc (Charles Sturt University), MTax (University of New South Wales); FCPA (Australia), FTIA, FSIArb; Advocate and Solicitor (Singapore). Leonard GOH MA (Cambridge); Advocate and Solicitor (Singapore); Legal Officer, Accounting and Corporate Regulatory Authority. |
| Date | 01 December 2011 |
22.1 The Supreme Court delivered nine decisions in eight cases in 2011 which related to tax law, some of which (as it shall be seen below) only dealt with tax law in passing.
22.2 The one and only income tax decision of the High Court dealt with the issue of deductions. There was also only one property tax decision where the High Court dealt with the determination of the annual value of 117 units in a well-known office building within the Central Business District. Of the three cases discussing stamp duty, the main case involved how multiple sale and purchase agreements entered into between the same vendor and purchaser ought to be stamped.
22.3 There were two cases dealing with goods and services tax (GST). The one miscellaneous case involved the UK tax authority and the question of whether our courts would be regarded as entertaining a claim involving the enforcement of a foreign governmental interest. This case was heard and decided by both the High Court and the Court of Appeal within the same year.
22.4 There are therefore, in our view, eight cases for the year 2011 which had relevance to revenue law:
| Tax Type | High Court | Court of Appeal |
| Income tax | 1 | 0 |
| Stamp duty | 2 | 1 |
| Property tax | 1 | 0 |
| Goods and Services Tax | 2 | 0 |
| Miscellaneous | 1 | 1 |
Deductibility of losses due to defalcation
22.5 In the case of AQP v Comptroller of Income Tax[2012] 1 SLR 185 (QP) (decision delivered on 17 October 2011), the High Court (Tay Yong Kwang J) had to consider the issue of deduction in a case involving losses as a result of defalcation. The High Court agreed with the Comptroller of Income Tax (Comptroller) that the losses were not deductible.
22.6 The salient facts of the case (AQP at [3][9]) revolved round the former managing director (Ex-MD) of the appellant company. The Ex-MD was dismissed as both director and managing director for misappropriating the company's funds as revealed by the investigations carried out by the Commercial Affairs Department. He was also convicted in a District Court of 24 charges of criminal breach of trust. During the criminal trial, it was revealed that his modus operandi was to make out false purchase orders to the appellant's suppliers for the purchase of stock in trade (in this case, bearings). He then procured several cheques to be issued in his favour or in favour of his nominees, purportedly on the basis that he had made advances from his personal account to make the purchases. He also falsely claimed reimbursement for loans purportedly to the appellant. The truth was that he had misappropriated the money to pay for his gambling debts and for personal use.
22.7 In the event, the appellant made provisions for doubtful debts amounting to more than S$12 million which included the losses due to the misappropriations by the Ex-MD. However, the appellant did not claim these losses as a deduction for the relevant year of assessment (ie, 2000). On 15 December 2005, the appellant then lodged a claim based on these losses on the basis of error or mistake within the meaning of s 93A of the Income Tax Act (Cap 134, 2008 Rev Ed) (ITA). The claim was rejected by the Comptroller, and on appeal, by the Income Tax Board of Review (ITBR).
22.8 As framed by Tay J, two issues arose from this case on appeal to the High Court:
(a) were the losses wholly and exclusively incurred by the appellant in its production of income under s 14(1) of the ITA?
(b) can an erroneous opinion or a grossly negligent error, such as a mistake of law, constitute an error or mistake under s 93A of the ITA?
22.9 The general position on deductibility under s 14(1) of the ITA was clear. Tay J noted (AQP at [21]) that s 14(1) requires a nexus between the incurrence of the expense and the production of income (as reiterated by the Court of Appeal in Pinetree Resort Pte Ltd v Comptroller of Income Tax[2000] 3 SLR(R) 136). The issue however was the treatment of losses sustained by a company due to defalcation of an employee and whether the requisite nexus existed. As asked by the learned judge (AQP at [22]): When would losses resulting from defalcation have sufficient nexus to be considered wholly and exclusively incurred in the production of the income?
22.10 The point had previously arisen in the seminal English case of Curtis (HM Inspector of Taxes) v J & G Oldfield LimitedTAX(1925) 9 TC 319 (Curtis), which also involved a managing director that had passed many payments and receipts in relation to his private affairs through the company's books. The managing director had control of the company's business in wines and spirits. The High Court rejected the company's submission that the losses were trading losses and therefore deductible from the company's profits for income tax purposes. The so-called Curtis test was laid down by Rowlatt J as follows (Curtis at [24]):
When the Rule speaks of a bad debt it means a debt which is a debt that would have come into the balance sheet as a trading debt in the trade that is in question and that it is bad. It does not really mean any bad debt which, when it was a good debt, would not have come in to swell the profits. What the Commissioners have been misled by, in my judgment, quite clearly is this. They have allowed themselves to act under the impression that they were taxing the Company on what the Company in a loose way had made and secured. In point of law they were engaged in assessing the profits of the Company's trade, not of the Company itself but of the Company's trade, and I have to consider whether there is the least ground for supposing that losses of these sums resulting in this bad debt were losses in the trade. I quite think that if you have a business (which for the purposes of to-day at any rate I will assume) in the course of which you have to employ subordinates, and owing to the negligence or the dishonesty of the subordinates some of the receipts of the business do not find their way into the till, or some of the bills are not collected at all, or something of that sort, that may be an expense connected with and arising out of the trade in the most complete sense of the word. But here that is not this case at all. This gentleman was the Managing Director of the Company, and he was in charge of the whole thing, and all we know is that in the books of the Company which do exist it is found that moneys went through the books into his pocket. I do not see that there is any evidence at all that there was a loss in the trade in that respect. It simply means that the assets of the Company, moneys which the Company had got and which had got home to the Company, got into the control of the Managing Director of the Company, and he took them out. It seems to me that what has happened is that he has made away with receipts of the Company dehors the trade altogether in virtue of his position as Managing Director in the office and being in a position to do exactly what helikes. [emphasis added]
22.11 In surveying how the Curtis test had been subsequently considered or applied in various jurisdictions (ie, UK, Australia, New Zealand, Canada, India and South Africa) (AQP at [27][51]), Tay J held that the correct understanding of the test had been applied by the ITBR, and that understanding in his Honour's view was as follows (AQP at [54]):
Did the defalcator possess an overriding power or control in the company (ie, in a position to do exactly what he likes) and was the defalcation committed in the exercise of such power or control? If so, the losses which result from such defalcations are not deductible for income tax purposes.
22.12 The court rejected the wider understanding contended for by the appellant as being undesirably wide: AQP at [55]. The appellant had argued that the Curtis test distinguished losses arising from the company's trading activities from those arising outside of...
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