AQP v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judge: Chao Hick Tin JA
• Judgment Date: 16 January 2013
• Neutral Citation: [2013] SGCA 3
• Plaintiff Counsel: Nand Singh Gandhi and Li Weiming Mark (Allen & Gledhill LLP)
• Docket Number: Civil Appeal No 139 of 2011
• Date: 16 January 2013
• Hearing Date: 18 October 2012
• Subject Matter: Revenue Law,Income Taxation,Deduction
• Published date: 25 January 2013
• Citation: [2013] SGCA 3
• Defendant Counsel: David Chong SC, Lee Cheow Han (Attorney-General's Chambers), Liu Hern Kuan, Julia Mohamed and Joyce Chee (Inland Revenue Authority of Singapore)
• Court: Court of Appeal (Singapore)
• Year: 2013

Andrew Phang Boon Leong JA (delivering the judgment of the court): Introduction

This is an appeal against the decision of a High Court judge (“the Judge”), holding that the loss suffered by the taxpayer (“the Appellant”) due to misappropriation of its funds by its ex-Managing Director (“the Ex-MD”) does not qualify as a deduction under s 14(1) of the Income Tax Act (Cap 134, 2008 Rev Ed) (“the Act”) (see AQP v Comptroller of Income Tax [2012] 1 SLR 185 (“the Judgment”)).

Facts

The Appellant is a company that was listed on the Stock Exchange of Singapore Dealing and Automated Quotation (SESDAQ) in 1995 and, subsequently, the Singapore Exchange Limited (SGX) Mainboard on 2 February 1998.¹ The Ex-MD was the Managing Director of the Appellant from 20 October 1995 to 1 December 1999, when he was dismissed for misappropriating the Appellant’s funds.² In 2001, the Ex-MD was convicted of criminal breach of trust after the District Judge (“the DJ”) found that he had, on various occasions between September 1997 and August 1998, falsely claimed to have paid money to the Appellant’s suppliers and customers, either as deposits for goods or as loans, and then “reimbursed” himself from the Appellant’s funds (see Public Prosecutor v Kwek Chee Tong [2001] SGDC 194 (“PP v KCT”).³

As a result of these misappropriations, the Appellant lost $12,272,917 (“the Loss”).⁴ The Appellant made a provision for doubtful debts including the Loss in its statutory accounts for the year ended 31 December 1999 but did not claim a deduction for the Loss in its income tax return for the Year of Assessment 2000.⁵ Although the Appellant obtained judgment against the Ex-MD in 2003 for the money misappropriated, it could not recover anything and the Ex-MD was subsequently declared a bankrupt.⁶

On 15 December 2005, the Appellant applied to the Respondent for relief under s 93A of the Act (“s 93A”) on the basis that it had made an “error or mistake” within the meaning of that section by not claiming a deduction for the Loss under s 14(1) of the Act in its income tax return for the Year of Assessment 2000.⁷ On 1 December 2008, the Respondent made a determination that no relief would be granted as no “error or mistake” had been made.⁸

The decision of the Income Tax Board of Review

On the Appellant’s appeal to the Income Tax Board of Review (“the Board”), the Board upheld the Respondent’s determination (see AQP v Comptroller of Income Tax [2010] SGITBR 1 (“the Board’s Decision”)). The appeal was on premised two grounds. The first ground, which is relevant to the present appeal, was that the Loss arising from the Ex-MD’s misappropriation occurred in the course of the Appellant’s normal income-earning activities and therefore qualified for a deduction under s 14(1) of the Act. On the second ground that the Appellant’s omission in claiming a deduction for the Loss was an “error or mistake” within the meaning of s 93A, the Board found that the omission was a decision made after due consideration that the Loss was not an allowable deduction under s 14 of the Act, and that if the decision was a mistake it was one of law falling within the purview of s 93A. However, this particular issue was rendered academic in view of the Board’s decision on the first ground – to which we now turn. However, before proceeding to do so, we note that the Judge had also made some observations (albeit by way of obiter dicta as he had also, like the Board, found against the Appellant with regard to the first ground) in the Judgment (at [93]–[105]) with regard to the scope of s 93A. However, as the issue of the nature and scope of s 93A was not before this court, we do not propose to comment on the observations by either the Board or the Judge.

In considering the first ground of appeal, the Board referred to the English High Court decision of Curtis (H M Inspector of Taxes) v J & G Oldfield, Limited (1925) 9 TC 319 (“Curtis”) as well as the subsequent Scottish decision of The Roebank Printing Company, Limited v The Commissioners of Inland Revenue (1928) SC 701, 13 TC 864 (“Roebank”) and the English High Court decision of Bamford (H M Inspector of Taxes) v A T A Advertising Ltd (1972) 48 TC 359 (“Bamford”), where Curtis was considered. In brief, the facts of Curtis were that the Managing Director of the taxpayer company was, for many years, in sole control of the company’s business, which was run very informally. Indeed, an investigation after his death revealed that there appeared to have been no auditors appointed and an almost entire absence of balance sheets for recent years. It also revealed that moneys had passed through the company’s books which related to his private affairs (and not the company’s business), amounting to some £14,000, which debt was due from his estate to the company. As this debt was valueless, it was written off as a bad debt. The General Commissioners allowed the company’s claim to deduct this amount in computing its profits for assessment to income tax. On appeal, the High Court reversed the decision of the General Commissioners and held that the loss in question was not a trading loss and thus was not an admissible deduction for income tax purposes. The following passage from Rowlatt J’s judgment (at 330-331) was cited by the Board (at [16] of the Board’s Decision):

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 he likes.

The Board observed (at [17] of the Board’s Decision) that the Ex-MD was a substantial shareholder of the Appellant: both directly and through his family company (“D Pte Ltd”), his interest or deemed interest ranged between 12.8% and 14.9%. The Board proceeded to hold (ibid) that:

As a substantial shareholder and Managing Director, and based on the evidence, the Ex-MD was in the language of Rowlatt J ... “in a position to do exactly what he likes”. This was as found by the [DJ] in [PP v KCT]. At paragraph 284 of his Grounds of Decision, the [DJ] stated: “The accused was Managing Director of both [AQP] and [D Pte Ltd]. The evidence revealed that no one questioned his instructions. There was total trust reposed in the accused by virtue of his senior management position. In evidence he said that he need not have to tell anyone about, and (as a fact) he had complete control over, the usage of [AQP’s] funds. He had access to millions of dollars as [AQP] was a public listed company ...”

[emphasis in original]

The Board concluded (at [21] of the Board’s Decision) that in line with the principles stated in the case authorities, the Loss did not qualify for deduction under s 14(1) of the Act and the appeal was accordingly dismissed.

The decision of the Judge

On the Appellant’s appeal to the High Court, the Judge upheld the Board’s decision that the Loss did not qualify for a deduction under s 14(1) of the Act. According to the Judge, Curtis laid down the following test which determines the tax-deductibility of loss incurred by a company as a result of defalcation by its employee (see the Judgment at [54]):

Having surveyed the various approaches in different Commonwealth jurisdictions, I have come to the view that the correct understanding of the Curtis test was applied by the Board. The correct understanding of the Curtis tes[t], in my view, is as follows: 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.

We will refer to this test as the “overriding power or control” test. The Judge held that the “overriding power or control” test should be adopted in Singapore because the Commonwealth cases are, on the whole, in greater support of this test (see the Judgment at [56]–[68]) and that this approach is legally sound and justifiable in...