Comptroller of Income Tax v GE Pacific Pte Ltd

• Jurisdiction: Singapore
• Judge: Karthigesu JA
• Judgment Date: 18 May 1994
• Neutral Citation: [1994] SGCA 73
• Citation: [1994] SGCA 73
• Defendant Counsel: Sat Pal Khattar and Gurbachan Singh (Khattar Wong & Pnrs)
• Published date: 19 September 2003
• Plaintiff Counsel: Jiang Siew Ming, S Sharma and David Lim (Inland Revenue Authority of Singapore)
• Date: 01 July 1994
• Docket Number: Civil Appeal No 190 of 1993
• Court: Court of Appeal (Singapore)
• Subject Matter: Whether remaining allowances available to the buyer or the seller,Income taxation,ss 19A & 24 Income Tax Act (Cap 134, 1992 Ed),Special allowances under s 19A of the Income Tax Act,Purposive approach,Intention of Parliament,Statutory Interpretation,Ambiguity,Capital allowance,Sale of plant and machinery between related parties,Construction of statute,Revenue Law,Literal,s 9A(1) Interpretation Act (Cap 1),Election of parties under s 24(2) of the Act

Cur Adv Vult

This case concerns whether the respondent is entitled to certain special allowances for capital expenditure under the Income Tax Act (Cap 134) (`the Act`). The single issue upon which this appeal turns is the true construction to be afforded s 24(2)(c) of the Act.

The facts

The facts of this case are not in dispute. The respondent, GE Pacific Private Ltd, is a company incorporated in Singapore and a wholly-owned subsidiary of General Electric Co of the USA (`GE`). It has been carrying on the business of manufacturing and selling electronic components in Singapore since 1970. In 1988, GE disposed of its semi-conductor business to Harris Corporation (`HC`). Part of this disposal included the transfer to HC of GE`s electronic components undertaking which was carried on in Singapore by the respondent. To effect this part of the transaction, Harris Semi-Conductor (Singapore) Pte Ltd (`HS`) was incorporated as a wholly-owned subsidiary of the respondent on 19 November 1988. Assets and liabilities of the respondent relating to its electronic components business were then sold to HS as from 30 November 1988. This sale included certain plant and machinery which qualified for capital allowances under ss 19A(1) and 19A(1A) of the Act. Subsequently, all the shares in HS were transferred by the respondent to HC.

By a notice dated 17 February 1989, the respondent and HS had elected for special tax treatment under s 24(2) of the Act. It should be noted that the qualifying plant and machinery was not leased by the respondent to HS before the sale and that it was used by the respondent before the sale and by HS after the sale in the production of their respective chargeable incomes.

HS`s first financial year was from 19 November 1988 to 30 June 1989 and, therefore, its first year of assessment was the year of assessment 1990. For the year of assessment 1989, it was the respondent who claimed the accelerated capital allowances available under ss 19A(1) and 19A(1A), even though the plant and machinery had already been sold as from 30 November 1988. The appellant, the Comptroller of Income Tax (`the Comptroller`), declined to allow the respondent these capital allowances and the respondent filed a notice of objection dated 8 August 1991. On 17 January 1992, the Comptroller replied that he did not intend to amend the assessments made on the respondent and on 22 January 1992, the respondent filed a notice of appeal with the Income Tax Board of Review (`the Board`). The judgment of the Board was issued on 11 December 1992 and held in favour of the Comptroller. An appeal was made successfully to the High Court, where the decision of the Board was overturned and it was held that the respondent was entitled to the capital allowances in question. [See GE Pacific Pte Ltd v Comptroller of Income Tax [1994] 1 SLR 307 .] The Comptroller then appealed to this court.

Capital expenditure allowances

Before considering the dispute between the parties, it is first necessary to understand the scheme of the Act vis-Ã -vis capital expenditure allowances. Section 10 of the Act imposes a tax on income earned in Singapore for each year of assessment. The tax payable for each year of assessment is with respect to the basis period which ended in the calendar year preceding the year of assessment. Thus, in the present case, HS`s first financial year was from 19 November 1988 and ended on 30 June 1989. This formed its first basis period for the purposes of the Act. Tax was then paid on income earned in that period in the year of assessment 1990.

Expenditure incurred in the production of the income is deductible under s 14 of the Act. However, it is only revenue expenditure that is so deductible and no reduction is made for expenditure of a capital nature. The Act does not provide for relief for capital losses nor for taxes on capital gains. This means that capital losses like the depreciation of fixed assets may not be deducted. However, the Act does provide for the depreciation of fixed assets to be written off against taxable income through the provision of various allowances. One set of allowances is provided for by s 19 of the Act which provides, inter alia:

(1) Where ... a person carrying on a trade, profession or business incurs capital expenditure on the provision of machinery or plant for the purposes of that trade, profession or business, there shall be made to him, on due claim for the year of assessment in the basis period for which the expenditure is incurred an allowance, to be know as an `initial allowance` ...

(2) Where at the end of the basis period for any year of assessment a person has in use machinery or plant for the purpose of his trade, profession or business, there shall be made to him, on due claim, in respect of that year of assessment an allowance for depreciation by wear and tear of those assets (to be known as an annual allowance) which shall be calculated in accordance with the following provisions ...

The initial allowance available under s 19(1) may be claimed where there has been expenditure on the provision of plant and machinery for the purposes of the taxpayer`s business. It is a one-time allowance which is only claimable in the year in which the asset is purchased. Section 19(2) then provides that an annual allowance may be claimed in subsequent years but only on the additional condition that the taxpayer has the machinery or plant in use at the end of that basis period.

In 1966, another set of capital expenditure allowances was introduced in s 19A which provides, inter alia:

(1) Notwithstanding section 19, where a person carrying on a trade, profession or business incurs capital expenditure during or after the basis period for the year of assessment 1985 on the provision of machinery or plant for the purposes of that trade, profession or business, he shall, in lieu of the allowances provided by section 19, be entitled for a period of 3 years to an annual allowance of 331/3% in respect of the capital expenditure incurred.

(1A) Notwithstanding section 19, where a person proves to the satisfaction of the Comptroller that he has installed a computer or other prescribed automation equipment for the purposes of a trade, business or profession carried on by him, he shall, in lieu of the allowances provided by subsection (1) or in section 19, be entitled, if he so elects, to an allowance of 100% in respect of the capital expenditure incurred during or after the basis period for the year of assessment 1985 on the provision of that computer or automation equipment.

Section 19A(1) allows the cost of plant and machinery to be written off in three years and s 19A(1A) provides for the cost of computers and automation to be written off in one year. These provisions of s 19A only expressly state the requirement that capital expenditure must have been incurred on the machinery for the purposes of the business. However, both ss 19A(1) and 19A(1A) are stated to be `in lieu of` s 19 and that necessarily means that a taxpayer only qualifies for s 19A allowances if the requirements for s 19 allowances are fulfilled (see Re Boddington, Boddington v Clairat for this interpretation of the phrase `in lieu of`). This means that the additional requirement in s 19(2) that the machinery be in use at the end of the basis period must also be satisfied for a successful claim under s 19A to be made.

Thus, if a taxpayer (1) incurred capital expenditure on plant or machinery for the purposes of his business; and (2) has the machinery in use at the end of the basis period for a particular year of assessment, that taxpayer would be entitled to choose between s 19 allowances and s 19A allowances. In the present case, the respondent elected for the accelerated allowances under s 19A.

However, entitlement to capital expenditure allowances was complicated in this case because the equipment in question was subsequently sold. Ordinarily, s 20 deals with this situation. It provides:

(1) Except as provided in this section, where at any time after the setting up and on or before the permanent discontinuance of a trade, profession or business, any event occurs whereby machinery or plant in respect of which allowances under section 19 or 19A have been made to a person carrying on a trade, profession or business ceases to belong to that person (whether on a sale of the machinery or plant or in any other circumstances of any description) ... an allowance or charge, to be known as a balancing allowance or a balancing charge, shall in the circumstances mentioned in this section be made to or, as the case may be, on that person for the year of assessment in the basis period for which that event occurs:

Provided that, where the property in machinery or plant passes at less than the open-market price, then for the purpose of determining the amount of any balancing allowance or balancing charge the event shall be treated as if it had given rise to sale moneys of an amount equal to the open-market price of the machinery or plant ...

(2) Where there are no sale ... moneys or where the amount of the capital expenditure of the person in question on the provision of the plant or machinery still unallowed as at the time of the event exceeds those moneys, a balancing allowance shall be made, and the amount thereof shall be the amount of the expenditure still unallowed as aforesaid or, as the case may be, the excess thereof over those moneys.

(3) If the sale ... moneys exceed the amount, if any, of the said expenditure still unallowed as at the time of the event, a balancing charge shall be made, and the amount on which it is made shall be an amount equal to the excess or, where the said amount still unallowed is nil, to those moneys.

In any given year of assessment, the ss 19 or 19A allowances already granted are deducted from the purchase price of an asset to determine its written-down tax...