Andermatt Investments Pte Ltd v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judge: Chao Hick Tin J
• Judgment Date: 12 August 1995
• Neutral Citation: [1995] SGCA 63
• Docket Number: Civil Appeal No 163 of 1994
• Date: 12 August 1995
• Published date: 19 September 2003
• Year: 1995
• Plaintiff Counsel: Nand Singh Gandhi (Nand Singh Gandhi & Co)
• Citation: [1995] SGCA 63
• Defendant Counsel: Julia Mohamed (Inland Revenue Authority of Singapore)
• Court: Court of Appeal (Singapore)
• Subject Matter: Deduction,Interest expenses incurred in repayment of outstanding debt resulting from taxpayer's purchase of shares of company which owned property producing rental income,Whether interest expense incurred on capital employed in acquiring the income,Interest expenses,Whether interest expense deductible from dividend income (from the shares) and/or rental income on liquidation of company and transfer of property to taxpayer as a return of capital,Income taxation,s 14(1)(a) Income Tax Act (Cap 134, 1994 Ed),Revenue Law

Cur Adv Vult

This is an appeal against a judgment of the High Court which dismissed the appellant`s appeal against a decision of the Income Tax Board of Review (the Board) which affirmed an assessment of the Comptroller of Income Tax. [See [1995] 1 SLR 66 .] The question in issue concerns essentially the deductibility of an amount of $201,172 under s 14(1)(a) of the Income Tax Act (Cap 134) (the Act), paid as interest by the taxpayer, the appellant, to a bank.

The facts of the case, which have been agreed to by the parties, are as follows:

(1) Andermatt Investments Pte Ltd (the appellant company) was incorporated on 28 November 1987 for the purpose of carrying on the business of investment holding including, inter alia, owning and leasing out the property known as No 1 Jalan Remaja, Singapore 1027 (the Hillview Property).

(2) The Hillview Property was originally held by Wan Holdings Pte Ltd (Wan Holdings), a company carrying on the business of investment holding. The Hillview Property was acquired and constructed by Wan Holdings at a cost of $3,446,630. Wan Holdings obtained a bank overdraft to finance the construction of the Hillview Property. The construction of the Hillview Property was completed in 1977 and revalued in 1987 to $8,500.000. The bank overdraft which was used to finance the construction of Hillview Property was repaid by Wan Holdings in March 1981. At all material times the property was earning rental income.

(3) On 8 December 1987 the appellant company purchased all the issued shares of Wan Holdings from the shareholders of Wan Holdings at a consideration of $20,000,030, and the appellant company became the holding company of Wan Holdings.

(4) Both the appellant company and Wan Holdings are (or were as the case may be) owned by the same members of the Wan family.

(5) $1,000,000 of the purchase consideration was paid by the appellant company from its paid-up share capital of $1,000,000. The remaining purchase consideration of $19,000,030 stood as a debt owing by the appellant company to the vendors.

(6) On 31 December 1987 the sole shareholder of Wan Holdings passed the requisite resolutions to initiate the winding-up of Wan Holdings by way of a members` voluntary winding-up, and to appoint liquidators forthwith.

(7) On 8 February 1988 the appellant company obtained an overdraft facility of $6m from Overseas-Chinese Banking Corp Ltd (OCBC). $5,800,000 of this facility was drawndown by the appellant company to satisfy part of the remaining purchase consideration as follows:

(i) $2,800,000 on 23 May 1988;

(ii) $1,000,000 on 31 May 1988; and

(iii) $2,000,000 on 30 June 1988.

(8) The Hillview Property was distributed by the liquidators of Wan Holdings to the appellant company on 31 March 1988 as a return of capital in specie.

(9) In the financial period from 28 November 1987 to 31 December 1988, the appellant company derived dividend income of $4,620,007 from its holding of the Wan Holdings shares. This was received by the appellant company on 5 January 1988. In the same financial period the appellant company also derived rental income from the Hillview Property in the amount of $599,845.54. Other than the rental and dividend income stated above, the appellant company did not derive any other income during the said financial period.

(10) In the same financial period the appellant company incurred interest costs on the $5,800,000 drawdown on the OCBC facility of $201,172.00.

(11) The appellant company, through its tax agents, Boon Suan Lee & Co, submitted a tax computation of the appellant company`s income tax liability for the year of assessment 1989 in which the interests costs of $201,172.00 was claimed as a deduction against its trading income, from the business of investment holding.

(12) By notice of additional assessment No 20-0078762-5 dated 16 August 1991 the Comptroller of Income Tax assessed the appellant company for the year of assessment 1989 to additional tax in the sum of $62,173.35 on the basis of the interest deduction of $201,172.00 being not allowable.

As the case concerns the construction of s 14(1), in particular sub-para (a), we will now set out that provision:

For the purpose of ascertaining the income of any person for any period from any source chargeable with tax under this Act (referred to in this Part as the income), there shall be deducted all outgoings and expenses wholly and exclusively incurred during that period by that person in the production of the income, including -

(a) except as hereinafter provided, any sum payable by way of interest upon any money borrowed by that person where the Comptroller is satisfied that the interest was payable on capital employed in acquiring the income.

The Board in affirming the Comptroller`s refusal to allow the deduction held that in order for the interest to qualify for deduction under s 14(1)(a) two conditions must be fulfilled:

(i) there must be a `direct link` or `close connection` between the money borrowed and the income produced; and

(ii) the link between the original purpose of the loan and the income must not be severed.

Appellant`s contention

The main contention of counsel for the taxpayer appellant is that the facts clearly show that the overdraft was taken to enable the appellant to complete the acquisition of the Hillview property. It was always the intention of the appellant to acquire the Hillview property. The acquisition of the shares in Wan Holdings was merely an interim step designed to take advantage of the concession given in the Stamp Duties Act (Cap 312) by which a transfer of shares in a company attracts duty at 0.2% while duty on the transfer of the underlying property in the company is at a rate of about 3%. Thus, the interest incurred on the overdraft should be deductible against the rental income derived from the property.

Counsel submitted that although the acquisition of the Hillview property took two steps to complete (first the purchase of shares and then the property), the connection between the money borrowed from OCBC and the rental income of the property was plainly there: they were linked. Without the overdraft the appellant could not have acquired the Hillview property which earned the rental income. The property was even mortgaged to secure the overdraft.

He contended that s 14(1)(a) talks of `capital employed in acquiring the income ` and not `the assets`; thus the assets acquired could alter so long as it could be shown that the income in question is linked to the loan obtained; it did not have to follow that the loan must be used to acquire the original asset. The law does not require that the historical link between the loan and the asset must always be preserved for interests to be deductible. Section 14(1)(a) is concerned with how capital was employed during the period in which the interest was incurred, not how the capital was employed when first raised or during some other period. It did not matter that the overdraft funds were used to pay the vendors of the shares of Wan Holdings. The pertinent question is not to whom the overdraft money was paid but for what: it was paid to enable an income-producing asset to be acquired. Thus, as long as the necessary linkage can be shown between the income being earned and the maintaining of the overdraft, the interest is deductible.

Counsel submitted that the learned judge below erred in the following respects:

(i) In holding that as the Hillview property had already been distributed to the appellant when the overdraft was drawn up, the interest was not incidental or relevant to acquiring the rental income;

(ii) in finding that the money borrowed did not replace original funds employed in acquiring income in respect of profits from trade;

(iii) in holding that if an asset (acquired with borrowed money) is substituted in the normal course of business from one producing dividends to another producing say rent the deductibility of the interest on the loan shall come to an end.

Respondent`s submission

The respondent`s submission is that the overdraft was drawn to extinguish an existing debt. It had nothing to do with the acquisition of the Hillview property. The overdraft was arranged in February 1988. Drawdowns were only made in May and June 1988. At that point in time the Hillview property had already been transferred to the appellant who was entitled to the rent arising therefrom. The overdraft was used by the appellant to pay the debt due to the vendors of the Wan Holding shares. Thus, the interest incurred is not deductible because it was not interest on `capital employed in acquiring the (rental) income` - the capital was employed to pay up a debt due to the vendors of the shares: see Thwaites v Commissioner of Income Tax . The vesting of the property as a return of capital in specie cannot convert an overdraft taken to extinguish a liability to be an overdraft to finance the purchase of the property. The interest expense paid to OCBC cannot be linked to the rental income, which is a distinct and separate source of income from dividends. The interest only became payable when the overdraft was drawn by which time the property had already been transferred to the appellant. The debt due to the vendors of the shares is a different matter altogether.

As regards the alternative argument of substitution, that the property was substituted for the shares, the respondent submitted that the rent received, which is a profit from trade under s 10(1)(a) of...