BFC v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judge: Sundaresh Menon CJ
• Judgment Date: 25 July 2014
• Neutral Citation: [2014] SGCA 39
• Court: Court of Appeal (Singapore)
• Hearing Date: 18 March 2014
• Docket Number: Civil Appeal No 124 of 2013
• Plaintiff Counsel: Tan Kay Kheng, Tan Shao Tong, Novella Chan and Jeremiah Soh (WongPartnership LLP)
• Defendant Counsel: Quek Hui Ling, Jimmy Goh Yak Hong and Michelle Chee Yen Yen (Inland Revenue Authority of Singapore)
• Subject Matter: Revenue Law,Income Taxation,Deduction
• Published date: 15 August 2014

Chao Hick Tin JA (delivering the judgment of the court): Introduction

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 take a number of forms, of which there are at least three. The company might pay what is called “interest”. Or it might issue the bonds at a discount, which is to say, at an issue price less than the face value (ie, the principal amount) of the bonds. Or it might pay, on redemption, a premium over and above the face value of the bonds (referred to hereafter as a “redemption premium”). From the perspective of the company issuing the bonds, each of these forms of consideration for the loan would understandably be a type of cost or expense incurred in borrowing the money raised from the bond issue.

The heart of this appeal concerns the tax treatment of these three types of borrowing costs – interest, discounts and redemption premiums. The appellant, BFC (“the Appellant”), is a company that, in issuing bonds, incurred all three types of borrowing costs. In general terms, the law allows a taxpayer to reduce the quantum of income on which he has to pay income tax by deducting certain of the costs or expenses incurred in producing his income. When the respondent tax authority (“the Respondent”) assessed the quantum of the Appellant’s income which was chargeable with tax, it allowed the deduction of an amount corresponding to a portion of the interest that the Appellant paid on the bonds. However, the Respondent did not allow the deduction of a similar portion of the discounts offered and the redemption premium paid in respect of those bonds.

Before us, the Appellant challenges the correctness of the Respondent’s decision to refuse the deduction of any part of the aforesaid discounts and redemption premium, having done so unsuccessfully before the Income Tax Board of Review and in the court below. The Appellant’s essential position is that there should be no difference in the income tax treatment accorded to the three types of borrowing costs which it incurred in issuing the bonds, viz, the interest on the one hand, and the discounts and the redemption premium on the other: deductions should be allowed in respect of the latter just as they were allowed in respect of the former.

The facts

The Appellant owns and operates a hotel in the central part of Singapore (“the Hotel”). In 1995, it issued bonds with a face value of $150m (“the 1995 Bonds”). It issued these bonds at a price of $149,354,250, being 99.5695% of their face value, meaning that it offered a discount of 0.4305% or $645,750 to the purchasers of the bonds. The 1995 Bonds were secured bonds maturing in 2000. On maturity, the Appellant was bound to redeem the bonds by paying their face value (ie, the principal amount of $150m), plus a redemption premium of 1.5% of the principal amount or $2.25m. Until the bonds were redeemed, the Appellant had to pay interest on the principal amount at the rate of 5.625% per annum.

In 1996, the Appellant issued another set of bonds (“the 1996 Bonds”). These were unsecured bonds with a face value of $165m maturing in 2001. It issued these bonds at a price of $153,317,505, being 92.9197% of their face value, meaning that it offered a discount of 7.0803% or $11,682,495 to the purchasers of the bonds. No redemption premium was offered on the 1996 Bonds. On maturity, the Appellant’s obligation was simply to pay the principal amount of $165m. In addition to this, interest was payable on the principal amount at the rate of 5.75% per annum.

This appeal concerns the Respondent’s assessment of the Appellant’s taxable income for the Years of Assessment 2001 and 2002. These Years of Assessment correspond to calendar years 2000 and 2001, which saw the maturity and redemption of, respectively, the 1995 Bonds and the 1996 Bonds (collectively referred to hereafter as “the Bonds” where appropriate to the context). Before describing this assessment in any detail, we first set out the law governing the deductions allowed in assessing income tax as this would aid in understanding why the Respondent assessed the Appellant’s taxable income in the way that it did.

The law on deductions in the assessment of income tax

The legislation in force during the Years of Assessment 2001 and 2002, which is also the applicable statute in this appeal, was the Income Tax Act (Cap 134, 2001 Rev Ed) (“the 2001 Act”). Under s 10(1) of the 2001 Act, income tax is payable “upon the income” of a person in respect of a number of categories of income listed in ss 10(1)(a)–10(1)(g), including gains or profits from a trade or business or from employment. But, the quantum of income on which income tax is payable may be reduced by deductions allowed under other provisions of the 2001 Act. These deductions are allowed only if they fulfil the cumulative criteria of being within the permissive provisions of s 14(1) and outside the prohibitive provisions of s 15(1).

The body of s 14(1) contains what is known as a general deduction formula that allows the deduction of “all outgoings and expenses wholly and exclusively incurred” in producing income. In addition to that, the subsections under s 14(1) allow a catalogue of specific deductions. In the present case, the subsection in issue is s 14(1)(a), which allows the deduction of sums “payable by way of interest upon any money borrowed” [emphasis added], provided the interest is “payable on capital employed in acquiring the income” [emphasis added]. Much of the instant appeal concerns the meaning to be given to the legal concept of “interest” in s 14(1)(a) (referred to hereafter as “‘interest’ for s 14(1)(a) purposes” where appropriate to the context). There is also a set of restrictions on deductibility in s 15(1), and the particular restriction relevant to the present case is that in s 15(1)(c), which prohibits deductions in respect of “any capital withdrawn or any sum employed or intended to be employed as capital except as provided in section 14(1)(h) [s 14(1)(h) is not applicable in this appeal]”. Section 15(1) seems to be an overriding provision because it begins with the words “Notwithstanding the provisions of this Act”. But, as will become apparent later, these words do not remove from controversy the relationship between s 14(1)(a) and s 15(1)(c), in particular (for the purposes of this appeal), the question of whether or not s 14(1)(a) is subject to s 15(1)(c). For a proper appreciation of the problem, there is a need for us to set out ss 14(1), 14(1)(a) and 15(1)(c) of the 2001 Act in full:

Deductions allowed 14.—(1) For the purpose of ascertaining the income of any person for any period from any source chargeable with tax under this Act (referred to in this Part as the income), there shall be deducted all outgoings and expenses wholly and exclusively incurred during that period by that person in the production of the income, including — (a) except as provided in this section, any sum payable by way of interest upon any money borrowed by that person where the Comptroller [the Respondent in the present case] is satisfied that the interest was payable on capital employed in acquiring the income; … Deductions not allowed

15.—(1) Notwithstanding the provisions of this Act, for the purpose of ascertaining the income of any person, no deduction shall be allowed in respect of — ... (c) any capital withdrawn or any sum employed or intended to be employed as capital except as provided in section 14(1)(h); …

[emphasis added]

We should add at this juncture that although the applicable version of the Income Tax Act in this appeal is the 2001 Act, some of the legislative provisions and cases which we will discuss relate to ss 14 and/or 15 of the 1999, the 2004 and the 2008 revised editions of the Income Tax Act. Section 14(1) in each of these revised editions is identical to s 14(1) of the 2001 Act; thus, for convenience, these versions of s 14(1), including s 14(1) of the 2001 Act itself, will be referred to generically as “s 14(1)”. Similarly, as s 15(1)(c) of the 2001 Act is identical to the version of s 15(1)(c) in the 1999, the 2004 and the 2008 revised editions of the Income Tax Act, all these versions of s 15(1)(c), including s 15(1)(c) of the 2001 Act itself, will be referred to generically as “s 15(1)(c)”. In contrast, s 14(1)(a) of the 2001 Act is identical to the version of s 14(1)(a) in the 1999 and the 2004 revised editions of the Income Tax Act, but different from the version of s 14(1)(a) in the 2008 revised edition of that Act. For ease of reference, s 14(1)(a) of the 2001 Act and the version of s 14(1)(a) in the 1999 and the 2004 revised editions of the Income Tax Act will be termed “s 14(1)(a)”, while the version of s 14(1)(a) in the 2008 revised edition of the Income Tax Act will be termed “the amended s 14(1)(a)”.

The relationship between s 14(1) and s 14(1)(a)

We will first say something about the word “including” at the end of the body of s 14(1). In our opinion, read in its proper context, this is “a term of extension and not of restrictive definition”. Putting it another way, it would not be inapt to substitute the word “including” with words such as “and the following” or “as well as the following”. This was the view of Buttrose J in the local High Court case of MNO v Comptroller of Income Tax (1961) 27 MLJ 223 at 224, and it is also common ground between the parties in the present case. What this effectively means is that the specific deductions catalogued in ss 14(1)(a)–14(1)(h) of the 2001 Act are not necessarily particular applications of the general deduction formula in the body of s 14(1). On the contrary, the specific deductions may be wider than the general deduction formula in the sense that they are n...