Andermatt Investments Pte Ltd v Comptroller of Income Tax

• Judgment Date: 27 September 1994
• Date: 27 September 1994
• Docket Number: District Court Appeal No 68 of 1993
• Court: High Court (Singapore)

Andermatt Investments Pte Ltd

Plaintiff

and

Comptroller of Income Tax

Defendant

[1994] SGHC 241

Lim Teong Qwee JC

District Court Appeal No 68 of 1993

High Court

Revenue Law–Income taxation–Deduction–Interest expenses–Interest expenses incurred due to loan repayment for purchase of shares of a company yielding rental income–Whether interest expenses deductible from trading income accruing from share dividends and rental income–Section 14 (1) (a) Income Tax Act (Cap 134)–Words And Phrases–“The income”–Section 14 (1) (a) Income Tax Act (Cap 134)

The appellant, Andermatt, carried out the business of investment holding, including owning and leasing out of a property (the “Hillview property”), originally acquired and constructed by Wan Holdings. Subsequently, Andermatt purchased all the shares in Wan Holdings for $20,000,030. It paid the vendors $1m, with the remaining purchase consideration standing as debt owing. Andermatt obtained a $6m overdraft facility of which $5.8m was drawn down to satisfy part of the remaining purchase consideration. Andermatt wound up Wan Holdings and the liquidators of Wan Holdings distributed the Hillview property to Andermatt as a return of capital in specie. From 28 November 1987 to 31 December 1987, Andermatt derived dividend income of $4,620,007 from the Wan Holdings shares and rental income of $599,845.54 from the Hillview property; it incurred interest expenses of $201,172 on the overdraft facility and sought to claim this as a deduction against its trading income from investment holding. The respondent Comptroller did not allow this deduction and assessed Andermatt an additional tax of $62,173.35. The Board of Review confirmed the assessment and Andermatt appealed, arguing that the interest ought to be deductible under s 14 (1) (a) of the Income Tax Act (Cap 134, 1994 Rev Ed) (“the Act”). Andermatt argued that: (a) “the income” in s 14 (1) (a)meant assessable income generally and not any specific income or the income of the year in which the expenditure was incurred; and (b) the holding of Wan Holdings shares was substituted by the Hillview property and the acquisition which was originally financed by deferred payment or a debt due to the vendors has been refinanced by the bank borrowing.

Held, dismissing the appeal and confirming the notice of additional assessment:

(1) The expression “the income” in s 14 (1) (a) of the Act referred to the income from a specific source for a specific period and not total income from all sources for that period. It referred to income from that source for that period in acquiring which such capital has been employed. Section 14 (1) (a) provided that interest on such capital was to be deducted from income from that source and not any income or the assessable income. Where the interest exceeded the income from that source, the excess was not available as a deduction from income from another source: at [20].

(2) The substitution of the Hillview property for the shares did not have the effect of continuing the income in respect of dividends. By acquiring the Hillview property Andermatt acquired income from a new source from the rent received. As such, the interest on capital employed in acquiring income in respect of such profits from trade could not be deducted from income in respect of dividends and vice versa: at [26].

(3) The original financing by means of deferred payment was employed in acquiring income in respect of dividends. The financing by bank borrowing was not so employed as there was nothing left to finance. It was not a case of refinancing in regard to income in respect of dividends. There was no refinancing in any sense with respect to income in respect of profits from trade from the Hillview property rent: at [29].

Begg v Federal Commissioner of Taxation (1937) 4 ATD 257 (refd)

Director-General of Inland Revenue v Rakyat Berjaya Sdn Bhd [1984] 1 MLJ 248 (refd)

FC of T v JD Roberts, FC of T v Smith92 ATC 4380 (distd)

Federal Commissioner of Taxation, The v Munro (1926) 38 CLR 153 (refd)

Federal Commissioner of Taxation v Total Holdings (Australia) Pty Limited79 ATC 4279 (refd)

Kidston Goldmines Ltd v FC of T91 ATC 4538 (refd)

Ronpibon Tin No Liability v Federal Commissioner of Taxation (1949) 78 CLR 47 (refd)

Thwaites v Commissioner of Income Tax (1973) 27 WIR 181 (refd)

Yeung v Federal Commissioner of Taxation88 ATC 4193 (distd)

Income Tax Act (Cap 134)s 14 (1) (a) (consd);ss 10 (1),35, 37, 38,42

Income Tax Assessment Act1922-1934 (Cth)s 23 (1) (a)

Income Tax Assessment Act1936-1972 (Cth)s 51 (1)

Income Tax Law1954 (Jamaica)ss 2, 5,8 (1)

Nand Singh Gandhi (Nand Singh Gandi & Co) for the appellant

Ang Su-Lin, Tan Kay Kheng and Julia Mohamed (Inland Revenue Authority of Singapore) for the respondent.

Judgment reserved.

Lim Teong Qwee JC

1 This is an appeal against the decision of the Board of Review given on 19 August 1993 dismissing the taxpayer's appeal against the assessment of the Comptroller by notice of additional assessment dated 16 August 1991 for the year of assessment 1989. The facts are agreed and those relevant to this appeal are summarised below:

(a) The taxpayer, Andermatt Investments Pte Ltd, was incorporated on 28 November 1987 for the purpose of carrying on the business of investment holding including, inter alia, the owning and leasing out of the property at 1 Jalan Remaja (“the Hillview property”).

(b) 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 $8.5m. The bank overdraft which was used to finance the construction of the Hillview property was repaid by Wan Holdings in March 1981. At all material times the property was earning rental income.

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

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

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

(f) On 31 December 1987, the taxpayer, as 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.

(g) On 8 February 1988, the taxpayer obtained an overdraft facility of $6m from the Oversea-Chinese Banking Corp Ltd (“OCBC”). $5.8m of this facility was drawn down by the taxpayer to satisfy part of the remaining purchase consideration as follows:

(i) $2.8m on 23 May 1988;

(ii) $1m on 31 May 1988; and

(iii) $2m on 30 June 1988.

(h) The Hillview property was distributed by the liquidators of Wan Holdings to the taxpayer on 31 March 1988 as a return of capital in specie.

(i) In the financial period from 28 November 1987 to 31 December 1988, the taxpayer derived dividend income of $4,620,007 from its holding of the Wan Holdings shares. This was received by the taxpayer on 5 January 1988. In the same financial...