AQP v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judgment Date: 17 October 2011
• Date: 17 October 2011
• Docket Number: Income Tax Appeal No 1 of 2010
• Court: High Court (Singapore)

AQP

Plaintiff

and

Comptroller of Income Tax

Defendant

[2011] SGHC 229

Tay Yong Kwang J

Income Tax Appeal No 1 of 2010

High Court

Revenue Law—Income taxation—Deduction—Taxpayer incurring loss due to fraudulent director's defalcation or misappropriation—Taxpayer claiming deduction for loss—Whether loss incurred from director's defalcation deductible for income tax purposes—Whether defalcator had overriding power or control in taxpayer—Whether defalcation committed in exercise of overriding power or control—Section 14 (1) Income Tax Act (Cap 134, 2008 Rev Ed)

Revenue Law—Income taxation—Reliefs—Taxpayer lodging claim for ‘error or mistake’ for tax assessed and paid—Taxpayer pleading mistake of law leading to assessment being excessive—Whether genuine mistake of law constituted ‘error or mistake’ under s 93 A (1) Income Tax Act (Cap 134, 2008 Rev Ed)—Sections 93 A (1) and 93 A (3) Income Tax Act (Cap 134, 2008 Rev Ed)

The appellant taxpayer was a company incorporated in Singapore. On 1 December 1999, the appellant dismissed its managing director (‘the Ex-MD’) for misappropriating the appellant's funds. The Ex-MD had made out false purchase orders to the appellant's suppliers, and falsely claimed to have made loans to the appellant's customers, before drawing from the appellant's funds under the pretext of reimbursement. The Ex-MD was charged and convicted in the District Court. The appellant incurred a loss of $12,272,917 (‘the Loss’) because of the Ex-MD's defalcation, and made a provision for doubtful debts in its statutory accounts for the year ended 31 December 1999. However, in preparing its income tax return and computation for the year of assessment 2000 (‘YA 2000’), the appellant omitted to include a deduction for the Loss incurred.

On 15 December 2005, the appellant lodged a claim for ‘error or mistake’ under s 93 A (1) of the Income Tax Act (Cap 134, 2008 Rev Ed) (‘the Act’) with the respondent Comptroller seeking relief for the Loss. The respondent made a determination that relief could not be granted as there was no ‘error or mistake’ within the meaning of s 93 A (1) of the Act.

On appeal by the appellant to the Income Tax Board of Review (‘the Board’), the Board held that the Loss incurred by the appellant was not deductible under s 14 (1) of the Act, the provision governing the deductibility of expenses. The Board held that losses incurred from the defalcation of a substantial shareholder or director ‘in a position to do exactly what he liked’, as the Ex-MD was in this case, were not deductible for income tax purposes (‘the Curtis test’). The Board thus dismissed the appellant's appeal; but opined that had the Loss been deductible, the appellant could have succeeded under s 93 A (1) of the Act in arguing that there had been a mistake of law whilst computing its income tax return for YA 2000. The appellant filed the present appeal against the Board's decision.

Held, dismissing the appeal:

(1) The correct understanding of the Curtis test as adopted in Singapore was as follows: Did the defalcator possess an overriding power or control in the company (ie, in a position to do exactly what he liked), and was the defalcation committed in the exercise of such power or control? If so, the losses which resulted from such defalcations were not deductible for income tax purposes: at [54].

(2) The Commonwealth cases largely supported the correct understanding of the Curtis test. Certain defalcation losses were held to be tax-deductible in some of these cases either because the defalcator did not possess an overriding power or control in his firm, or because the defalcation was not committed in the exercise of the defalcator's overriding power or control: at [57], [62], [63] and [65] to [68].

(3) The Curtis test as adopted in Singapore was legally sound and justifiable in policy. The rendering of certain defalcation losses as being tax-deductible under s 14 (1) of the Act was a common law exception rooted in two justifications: first, an expression of judicial sympathy towards large firms in their inability to keep all their employees in check; second, a form of deterrence against firms which did not provide adequate checks on employees who possessed such overriding power or control that they were able to incur great financial and social damage: at [72], [77] and [78].

(4) Keeping the deterrence justification in mind, the Curtis test had to be understood as being prescriptive of commercial practice, and the fact that the appellant's business was successful when the Ex-MD had overriding power or control was thus irrelevant. A taxpayer which chose to leave the power of certain directors or shareholders unchecked had to be made to undertake the risk that defalcation losses incurred as a result would not be tax-deductible: at [80].

(5) The alternative interpretation of the Curtis test as submitted by the appellant - ie,whether the loss arose in the course of the company's normal trading activities - was not a viable substitute. Such a test might lead to undesirable consequences because it would in effect mean that the more sophisticated the defalcation (ie,being disguised as part of the company's normal trading activities), the better it would be for a taxpayer for income tax purposes. This effect would be completely antithetical to the deterrence justification of the Curtis test: at [82] and [83].

(6) In application, the Curtis test functioned as a test of the factual arrangements within a firm. Even if the appellant had drawn up legal provisions which purportedly governed what the Ex-MD could or could not do, what ultimately mattered was whether the appellant factually did give the Ex-MD unjustified overriding power or control: at [85] and [86].

(7) In the present case, the Ex-MD had possessed an overriding power or control in the appellant as there was total trust reposed in him and he did not have to tell anyone about his usage of the appellant's funds. His defalcations were also committed in the exercise of such overriding power or control, as evident in the blatant way in which he had siphoned away funds from the appellant without restraint. The Loss incurred by the appellant from the Ex-MD's defalcation therefore did not qualify for deduction under s 14 (1) of the Act: at [88], [90], and [91].

(8) The meaning of the phrase ‘error or mistake’ under s 93 A (1) of the Act was wide enough to include any mistake so long as the mistake pertained solely to the computation of a taxpayer's taxable income, as opposed to a mistake relating to extrinsic considerations such as the commercial advantage of claiming for certain deductions. Therefore, a taxpayer's genuine mistake of law (ie, a mistake as to what was thought to be established law) whilst computing its taxable income was equally deserving of relief under s 93 A (1) as compared with a genuine mistake of fact: at [100] and [102].

[Observation: Deductibility in s 14 (1) of the Act was premised upon a ‘nexus’ between the alleged expense and the production of income, and one could maintain that there was no connection at all between a defalcation and the production of income. TheCurtis test was therefore a common law exception developed by the courts, rendering defalcation losses incurred by lower echelon employees of a firm as having sufficient nexus to be tax-deductible: at [71] and [72].

Section 93 A (3) of the Act appeared to have the effect of qualifying the granting of relief under s 93 A (1) to a taxpayer operating under a mistake of law. If the ‘practice of the Comptroller’ at the material time operated under the same mistake of law as to ‘the basis on which the liability of the [appellant] ought to have been computed’, the appellant would not be entitled to relief: at [103] and [104].]

AQP v Comptroller of Income Tax [2010] SGITBR 1 (folld)

Badridas Daga v Commissioner of Income Tax AIR 1958 SC 783 (refd)

Bamford (HM Inspector of Taxes) v ATA Advertising Ltd [ 1972] 1 WLR 1261; (1972) 48 TC 359 (folld)

Cassidy's Ltd v MNR [1990] 1 CTC 2043; 89 DTC 686 (folld)

Commissioner of Taxation (New South Wales) , The v Ash (1938) 61 CLR 26 (refd)

Commissioner of Taxes v Webber [1956] NZLR 552 (refd)

Curtis (HM Inspector of Taxes) v J & G Oldfield Ltd (1925) 9 TC 319 (folld)

DR & P v Comptroller of Income Tax (2001) 5 MSTC 293 (folld)

Extramoney Ltd v CIR [1997] 2 HKC 38 (folld)

Income Tax Case No 298 (1934) 8 SATC 58 (refd)

Lockie Bros Ltd v CIR (1922) 32 SATC 150 (refd)

Parkland Operations Ltd v R [1991] 1 CTC 23; 90 DTC 6676 (folld)

Pinetree Resort Pte Ltd v Comptroller of Income Tax [2000] 3 SLR (R) 136; [2000] 4 SLR 1 (folld)

PP v Kwek Chee Tong District Arrest Case No 48461 of 1999 (refd)

Roebank Printing Co Ltd, The v CIR [1928] SC 701; 13 TC 864 (folld)

Sassoon J David & Co (P) Ltd v Commissioner of Income-Tax (1975) 98 ITR 50 (refd)

W G Evans & Co Ltd v CIR [1976] 1 NZLR 425 (folld)

Income Tax Act (Cap 134,2008 Rev Ed) ss 14 (1) , 15 (1) (b) , 93 A (1) , 93 A (3) (consd) ; ss 14,93 A

Penal Code (Cap 224,1985 Rev Ed) s 409

Nand Singh Gandhi (Allen & Gledhill LLP) for the appellant

Julia Mohammed (Inland Revenue Authority of Singapore) for the respondent.

Judgment reserved.

Tay Yong Kwang J

Introduction

1 This is an appeal concerning the question whether losses caused to a company by a fraudulent director (‘the Ex-MD’) are deductible for income tax purposes under s 14 (1) of the Income Tax Act (Cap 134, 2008 Rev Ed) (‘the Act’). The Ex-MD had misappropriated company funds and caused the appellant to incur a loss of $12,272,917 (‘the Loss’). A few years after the Loss, the appellant lodged a claim with the respondent seeking relief for the Loss under s 93 A of the Act. The respondent rejected the appellant's claim.

2 After hearing the parties and considering the evidence and the submissions, I now dismiss the appeal. I will set out the reasons for my decision...