BFC v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judgment Date: 09 September 2013
• Date: 09 September 2013
• Docket Number: Income Tax Appeal No 2 of 2013
• Court: High Court (Singapore)

BFC

Plaintiff

and

Comptroller of Income Tax

Defendant

[2013] SGHC 169

Lai Siu Chiu J

Income Tax Appeal No 2 of 2013

High Court

Revenue Law—Income taxation—Deduction—Whether discounts and redemption premium incurred by taxpayer were deductible interest expenses—Whether discounts and redemption premium incurred by taxpayer were deductible revenue expenses—Sections 14 (1), 14 (1) (a) and 15 (1) (c) Income Tax Act (Cap 134, 2001 Rev Ed)

The taxpayer (‘the Appellant’) carried on the business of hospitality, investment holding and property investment. The Appellant also owned and operated a hotel (‘the Hotel’). In 1995 and 1996, the Appellant issued bonds. For the 1995 bonds, the Appellant offered a discount and redemption premium to the bondholders in addition to interest. For the 1996 bonds, the Appellant offered a discount to the purchasers in addition to interest. No redemption premium was offered for the 1996 bonds. The 1995 and 1996 bonds matured in 2000 and 2001 respectively. The Appellant redeemed both sets of bonds at full face value. As regards the 1995 bonds, the Appellant also paid the redemption premium to the bondholders.

In assessing the Appellant's income that was chargeable with tax, the Comptroller had allowed deductions for the interest paid on the 1995 and 1996 bonds. The Appellant then sought similar deductions for the discounts and redemption premium incurred on the 1995 and 1996 bonds. The comptroller disallowed the Appellant's claim on two grounds. First, the Comptroller found that the discounts and redemption premiums were not ‘interest’ and therefore not deductible under s 14 (1) (a) of the Income Tax Act (Cap 134, 2001 Rev Ed) (‘the ITA’). Second, the Comptroller found that the discounts and redemption premiums were not outgoings and expenses wholly and exclusively incurred in the production of the Appellant's income and, therefore, not deductible under s 14 (1) of the ITA. The Appellant's appeal to the Income Tax Board of Review (‘the ITBR’) was dismissed. The Appellant then appealed against the decision of the ITBR to the High Court.

Held, dismissing the appeal:

(1) Discounts and redemption premiums were not necessarily interest. If discounts and redemption premiums were to be regarded as interest by virtue of the fact that they were all borrowing costs, this would make nonsense of each concept individually. It was only where a payment made by a borrower bore the characteristics of interest, discount or a redemption premium that it could be properly called that, notwithstanding the label attached to it: at [30] and [31] .

(2) It was a fundamental feature of interest that it accrued with time. Discount was a deduction from the price fixed once and for all at the time of payment. Similarly, a redemption premium was a once-and-for-all payment made for some right. Therefore, true discounts and redemption premiums did not bear the feature of accrual with time: at [32] , [34] and [35] .

(3) The meaning of ‘interest’ under s 14 (1) (a) of the ITA was a question of statutory interpretation. Reference to the common law or ordinary meaning of ‘interest’ alone would have been wholly inadequate. Section 9 A of the Interpretation Act (Cap 1, 2002 Rev Ed) mandated that a purposive approach be taken in statutory interpretation. Taking such an approach in the present case, the question to be answered was whether ‘interest’, under s 14 (1) (a) of the ITA, when read within its statutory context, included the discount and redemption premium incurred by the Appellant in respect of the 1995 and 1996 bonds: at [38] to [40] .

(4) In interpreting s 14 (1) (a) of the ITA, no reliance was to be placed on the 2008 amendments to the ITA, as contained in the Income Tax Act (Cap 134, 2008 Rev Ed) and the Income Tax (Deductible Borrowing Costs) Regulations 2008 (S 115/2008). Subsequent legislation could not be used to interpret earlier legislation: at [44] to [47] .

(5) The charging provision of the ITA, namely s 10 (1) (d), provided for ‘interest’ and ‘discount’ to be chargeable with income tax. If the concepts of interest and discount were synonymous, Parliament would not have specified both under s 10 (1) (d) of the ITA. Effect had to be given to all the words of a statute. The ITBR was correct in finding that the ITA imported a difference between interest, discounts and redemption premiums, even if they were all examples of borrowing costs. To count as interest under the ITA, a payment had to be consideration paid by the borrower for the use of the lender's money which bore the fundamental feature of accrual with time: at [47] , [48] and [53] .

(6) The discounts and the redemption premium paid by the Appellant in respect of the 1995 and 1996 bonds did not accrue with time. They were one-off obligations, based on a fixed percentage of the principal loan amount. In the circumstances, the discounts and the redemption premium incurred by the taxpayer in respect of the 1995 bonds were not deductible as ‘interest’ under s 14 (1) (a) of the ITA: at [54] .

(7) The discounts and redemption premium incurred by the Appellant, were ‘outgoings and expenses’ under s 14 (1) of the ITA. The 1995 bonds were issued at a discount of 0.4305%, and the Appellant only received $149,354,250 instead of $150,000,000 at the time of issue. In relation to the 1996 bonds, they were issued at a discount of 7.0803%, and the Appellant only received the sum of $153,317,505 instead of $166,000,000 at the time of issue. By redeeming the 1995 and 1996 bonds at their full face value, the Appellant had incurred actual outgoings in the sums of $645,750 and $11,682,495 respectively: at [66] and [67] .

(8) Section 14 (1) of the ITA allowed deductions for expenses that were revenue as opposed to capital in nature. There had to be a close nexus between the incurring of the expenditure and the production of the income. Section 15 (1) (c) of the ITA disallowed the deduction of capital expenses.: at [68] to [70] .

(9) In distinguishing capital from revenue, the concept of ‘purpose’ was a principal legal tool. The question of whether interest or other borrowing costs were capital or revenue in nature would depend on the purpose of the underlying loan. In determining whether the purpose of the underlying loan was capital or revenue in nature, one had to first ascertain whether there was a sufficient relationship or linkage between the loan in question and the main project or transaction for which the loan was taken. One then had to ascertain whether the main project or transaction itself was capital or revenue in nature: at [74] , [76] and [78] .

(10) In determining the purpose of the bond issues, the court was entitled to have regard to the uses to which the bond proceeds were put although that in itself was not conclusive of the purpose of the bond issue. The true focus of the court's enquiry in distinguishing between capital and revenue expenses remained the purpose of the borrowing as opposed to the use of the borrowed funds: at [83] .

(11) The question of whether there was a sufficient linkage between the 1995 and 1996 bonds and the main transaction for which the bonds were issued was a question of fact and depended on all the circumstances of the case. On the evidence, the 1995 and 1996 bonds were issued for the following purposes: (a) to finance the renovation of the Appellant's hotel; (b) to refinance the existing borrowings of the Appellant and its subsidiaries; and (c) to finance the day-to-day operations of the Appellant's business. A sufficient linkage was established between the 1995 and 1996 bonds and each of these purposes: at [91] and [92] .

(12) The Appellant's hotel was a permanent (as opposed to temporary) asset that the Appellant used to generate its business income. The hotel refurbishment work had the effect of strengthening the Appellant's core business. Accordingly, the hotel refurbishment cost was capital as opposed to revenue in nature: at [95] .

(13) Where a later loan was taken out to refinance an earlier loan, one had to first ask whether the earlier loan was capital or revenue in nature. If the earlier loan was revenue in nature, it would follow that the later loan and the borrowing expenses incurred therewith would also be revenue in nature. It was incumbent on the Appellant to adduce evidence revealing the nature of the loans to be refinanced by the 1995 and 1996 bonds. The Appellant did not do so. It followed that the refinancing transactions for which the 1995 and 1996 bonds were issued were capital as opposed to revenue in nature: at [104] .

(14) As regards the portion of the bond proceeds which was to be put to use to finance the day-to-day operations of the Appellant's business, there was no linkage or an insufficient linkage between the 1995 and 1996 bonds and the specific uses (whether revenue or otherwise) to which the bond proceeds may have been put. The only linkage that could be established was between the 1995 and 1996 bonds and the general purpose of securing funds for the acquisition of working capital for the Appellant's business. Here, the bond proceeds themselves did not constitute the Appellant's working capital. Rather the Appellant had to use the bond proceeds to acquire its working capital. Therefore, the purpose of the borrowing was capital as opposed to revenue in nature: at [112] , [113] and [122] .

(15) As the purposes for which the 1995 and 1996 bonds were issued were capital in nature, the discounts and the redemption premium incurred by the Appellant in respect of those bonds were also capital in nature and were disallowed from deduction under s 15 (1) (c) of the ITA: at [123] .

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