BFC v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judgment Date: 25 July 2014
• Date: 25 July 2014
• Docket Number: Civil Appeal No 124 of 2013
• Court: Court of Appeal (Singapore)

BFC

Plaintiff

and

Comptroller of Income Tax

Defendant

[2014] SGCA 39

Sundaresh Menon CJ

,

Chao Hick Tin JA

and

Andrew Phang Boon Leong JA

Civil Appeal No 124 of 2013

Court of Appeal

Revenue Law—Income taxation—Deduction—Taxpayer issuing bonds on which it incurred three types of cost or expense, in that it paid interest, offered discounts and paid premium on redemption of bonds—Tax authority allowing deduction of one type of expense, namely interest, but not allowing deduction of other two, namely discounts and redemption premium—Whether taxpayer entitled to deductions in respect of discounts offered and redemption premium paid on bonds—Sections 14 (1), 14 (1) (a) and 15 (1) (c) Income Tax Act (Cap 134, 2001 Rev Ed)

The appellant taxpayer was a company that issued bonds. In issuing these bonds it incurred three types of cost or expense, in that it (a) paid interest on those bonds, (b) issued the bonds at a discount, and (c) paid a premium on redemption of the bonds. In assessing the quantum of the taxpayer's income chargeable with tax, the respondent (‘the Comptroller’) allowed deduction of an amount corresponding to a portion of the interest paid by the taxpayer on the bonds. But the Comptroller did not allow deduction of any amount corresponding to the discounts offered and the redemption premium paid on those same bonds. The taxpayer was dissatisfied with this. Its position was that deductions should be allowed in respect of the discounts and redemption premium just as, and to the same extent that, deductions had been permitted for the interest.

The taxpayer appealed to the Income Tax Board of Review (‘ITBR’) but its appeal was dismissed; it then appealed to the High Court but that was also unsuccessful. Finally it appealed to the Court of Appeal. Before the Court of Appeal the ultimate question was as it had been before the ITBR and the court below, which was whether the taxpayer was entitled to enjoy deductions in respect of the discounts offered and redemption premium paid.

The legislation governing the appeal was the Income Tax Act (Cap 134, 2001 Rev Ed). Under the statute deductions were allowed only if they fulfilled the cumulative criteria of being within the permissive provisions of s 14 (1) and outside the prohibitive provisions of s 15 (1). As to the permissive provisions, the body of s 14 (1) contained a general deduction formula allowing the deduction of ‘all outgoings and expenses wholly and exclusively incurred’ in producing income, while the subsections under s 14 (1) allowed a catalogue of specific deductions. The relevant subsection in this case was s 14 (1) (a), which allowed the deduction of ‘sums payable by way of interest upon any money borrowed’, provided the interest was ‘payable on capital employed in acquiring the income’. As to the prohibitive provisions, there was in s 15 (1) a set of restrictions on deductibility, the relevant restriction being that in s 15 (1) (c), which prohibited deduction in respect of ‘any capital withdrawn or any sum employed or intended to be employed as capital’. In other words s 15 (1) (c) prohibited the deduction of capital expenditure.

Given the structure of the legislative provisions there were three issues before the Court of Appeal. The first was whether the discounts and the redemption premium were ‘interest’ for s 14 (1) (a) purposes and hence deductible under s 14 (1) (a), with the taxpayer contending that they were. The second was whether the discounts and redemption premium were ‘outgoings and expenses wholly and exclusively incurred’ in the production of income and so deductible under the general deduction formula in s 14 (1), with the taxpayer again contending that they were. The third was whether the discounts and the redemption premium were capital expenditure and thus prohibited from deduction by s 15 (1) (c), and here the taxpayer contended that they were not.

Held, dismissing the appeal:

(1) Taking the third issue first, the discounts and redemption premium fell within the prohibitive provision s 15 (1) (c) because they were capital expenditure rather than revenue expenditure. Since the discounts and redemption premium were costs or expenses incurred in issuing the bonds, their classification as capital or revenue expenditure depended on whether the purposes of the bonds were to be regarded as capital or revenue in nature, and that in turn hinged on whether there could be shown sufficient linkage or relationship between the purposes of the bonds and a main transaction of a revenue nature. On the premise that the proceeds of the bonds could be divided into three parts corresponding to the three purposes to which the bond proceeds were applied, the taxpayer failed to establish sufficient linkage or relationship between any of these purposes and a main transaction of a revenue nature. Accordingly the whole of the proceeds obtained from the bonds was capital in nature and any costs or expenses incurred in issuing the bonds, including the discounts and redemption premium, were capital expenditure: at [28] to [34] .

(2) Taking the second issue next, it was not necessary to decide whether the discounts and redemption premium were ‘outgoings and expenses wholly and exclusively incurred’ in the production of income so as to fall within the general deduction formula in s 14 (1). Since they were capital expenditure their deduction would be prohibited by s 15 (1) (c) even if they came within the scope of s 14 (1): at [40] to [42] .

(3) Taking the first issue last, the discounts and redemption premium were not ‘interest’ for s 14 (1) (a) purposes and hence were not deductible thereunder. In essence the taxpayer's argument was that the concept of ‘interest’ should be interpreted broadly to mean any and all monetary consideration flowing from a borrower to a lender for a loan of money. That would encompass the discounts and redemption premium. But a narrower construction was to be preferred for two reasons. The first was that, since the general deduction formula in s 14 (1) was already expressed in very wide terms, there was no justification for an expansive approach in interpreting the specific deductions spelt out in the subsections that followed. The second was that, since the word ‘discounts’ was used alongside ‘interest’ elsewhere in the statute, it followed that the two terms meant different things: at [44] to [48] .

(4) Since the essence of interest was that it was compensation paid by a borrower for depriving a lender of use of the money loaned, it followed that the amount of interest to be paid on a loan should depend on the length or duration of the loan. Accordingly a definitive feature of ‘interest’ was that its total amount would depend on the duration of the loan. In this case, the discounts and redemption premium were one-off costs, the amount of which did not depend on the length of the period for which the bonds remained unredeemed. Therefore they were not ‘interest’ for s 14 (1) (a) purposes and were not deductible thereunder: at [48] to [54] .

[Observation: The relationship between ss 14 (1), 14 (1) (a) and 15 (1) (c) was as follows. The general deduction formula in s 14 (1) was subject to the prohibitive provision s 15 (1) (c), such that even if an item of capital expenditure fell within s 14 (1) it would be rendered non-deductible by s 15 (1) (c). By contrast, the specific deduction of ‘interest’ in s 14 (1) (a) carved out an exception to s 15 (1) (c). Interest paid on a loan would be a cost or expense incurred in taking the loan, and if the loan was capital in nature the interest would be capital expenditure which s 15 (1) (c) would ordinarily prohibit from deduction. But by reason of s 14 (1) (a), so long as some direct link could be established between the taxpayer's income and the loan, the interest payable would be deductible despite its being capital expenditure: at [38] to [40] .]

ABD Pte Ltd v Comptroller of Income Tax [2010] 3 SLR 609 (refd)

Andermatt Investments Pte Ltd v Comptroller of Income Tax [1995] 2 SLR (R) 866; [1995] 3 SLR 451 (refd)

Chng Gim Huat v PP [2000] 2 SLR (R) 360; [2000] 3 SLR 262 (refd)

Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd [1964] AC 948 (refd)

CIR v British Salmson Aero Engines Ltd [1938] 2 KB 482 (refd)

Comptroller of Income Tax v IA [2006] 4 SLR (R) 161; [2006] 4 SLR 161 (refd)

Federal Commissioner of Taxation v Hunter Douglas Ltd (1983) 50 ALR 97 (refd)

MNO v The Comptroller of Income Tax [1961] MLJ 223 (refd)

PP v Ng Guan Hup [2009] 4 SLR (R) 314; [2009] 4 SLR 314 (refd)

Regent Oil Co Ltd v Strick (Inspector of Taxes) [1966] AC 295 (refd)

Riches v Westminster Bank Ltd [1947] AC 390 (refd)

Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 (refd)

TLtd v Comptroller of Income Tax [2005] 4 SLR (R) 285; [2005] 4 SLR 285, HC (refd)

TLtd v Comptroller of Income Tax [2006] 2 SLR (R) 618; [2006] 2 SLR 618, CA (refd)

Wharf Properties Ltd v CIR [1997] AC 505 (refd)

Yusen Air & Sea Service (S) Pte Ltd v Changi International Airport Services Pte Ltd [1999] 3 SLR (R) 95; [1999] 4 SLR 135 (refd)

Income Tax Act (Cap 134, 2001 Rev Ed) ss 14 (1) , 14 (1) (a) , 15 (1) (c) (consd) ;ss 10 (1) , 10 (1) (a) - (g) , 10 (1) (d) , 10 (1) (g) , 14 (1) (a) - (h) , 15 (1)

Income Tax (Amendment No 2) Act 2007 (Act 53 of 2007)

Tan Kay Kheng, Tan Shao Tong, Novella Chan and Jeremiah Soh (Wong Partnership LLP) for the appellant

Quek Hui Ling, Jimmy Goh Yak Hong and Michelle Chee Yen Yen (Inland Revenue Authority of Singapore) for the respondent.

Judgment reserved.

Chao Hick Tin JA

(delivering the judgment of the court):

Introduction

1 This appeal raises the question of the deductibility of certain expenses incurred by a business entity in borrowing money. One of the methods by which a company can borrow money is by issuing bonds. The consideration for this method of borrowing money may...