Comptroller of Income Tax v IA

• Jurisdiction: Singapore
• Judge: Andrew Phang Boon Leong JA
• Judgment Date: 03 August 2006
• Neutral Citation: [2006] SGCA 24
• Date: 03 August 2006
• Subject Matter: Whether expenses capital or revenue in nature,Section 14(1) Income Tax Act (Cap 134, 2004 Rev Ed),Deduction,Revenue Law,Whether borrowing expenses, prepayment penalties, guarantee expenses incurred by taxpayer in connection with repayment of loan for developing property deductible against taxpayer's taxable income for certain years of assessment under s 14(1) Income Tax Act,Income taxation,Applicable tests for determining nature of expenses
• Docket Number: Civil Appeal No 4 of 2006
• Published date: 08 August 2006
• Defendant Counsel: Loo Lian Ee, Stacy Choong and Seah Ching Ling (Drew & Napier LLC)
• Court: Court of Appeal (Singapore)
• Plaintiff Counsel: Liu Hern Kuan and David Lim (Inland Revenue Authority of Singapore)

3 August 2006 Judgment reserved.

Andrew Phang Boon Leong JA (delivering the judgment of the court):

Introduction

1 It is a notorious and unfortunate fact that the distinction (in tax law) between the concept of capital on the one hand and that of revenue on the other is often elusive and even illusory. Even on the most promising of occasions, there are tremendous difficulties of application. This case is, unfortunately, no exception.

2 Indeed, it has often been stated that the difficulties referred to in the preceding paragraph arise precisely because it is all an issue of application. In other words, everything depends on the facts. This is true to some extent but it is, in our view, too facile a position to take without more (see also [65]–[66] below). The law must surely embody guiding principles that are both its lifeblood and hence its essence. The difficulty in discovering and/or stating these principles is no excuse for abandoning the search for them. The law is not – and cannot be – a mere agglomeration of disparate facts lost in the legal desert. To this end, we attempt, in the present proceedings, to both search for as well as state the relevant legal principles that are rooted in both logic as well as justice and fairness.

3 The factual matrix in the present proceedings was a straightforward one.

4 IA (“the respondent”) was incorporated as a property development company with a paid-up capital of $77,111,750. It purchased a parcel of land (“the Land”) for development into a condominium project (“the Condo Project”) for sale. The total purchase and development costs of the Land and the Condo Project amounted to approximately $403m.

5 The respondent had obtained a loan of $113m from a syndicate of banks (“the Syndicated Loan”). The agreement for the Syndicated Loan expressly provided (at cl 1.08 and sched 8 of the agreement) that the loan proceeds could only be used to finance the purchase price of the Land and the development costs of the Condo Project and the Syndicated Loan was so used. The Syndicated Loan was to be repaid 48 months from the date of the first drawdown of the land loan component or 30 June 1997, whichever was earlier, but there was provision to allow for early repayment.

6 As at 30 September 1994, the respondent had sufficient revenue receipts from progress payments made by purchasers of the apartments in the Condo Project to repay the entire outstanding amount under the Syndicated Loan. To withdraw the sum which was quarantined in the Project Account for the Condo Project (“the Project Account”) as required under the Housing Developers (Project Account) Rules (Cap 130, R 2, 1997 Rev Ed), the respondent had to furnish a bank guarantee for an amount equivalent to the amount to be withdrawn to the Urban Redevelopment Authority (“URA”). The respondent incurred the following expenses in obtaining the bank guarantees (“the Guarantee Expenses”):

(a)	Aggregate bank commission for three years; (based on the interest rate of 0.875%)	$2,605,750.00
(b)	Aggregate agency fees for three years; (based on the interest rate of 0.125%)	$ 383,100.00
(c)	Solicitors’ fees and disbursements	$ 9,933.15
		$2,998,783.15

7 For repaying the Syndicated Loan on a date earlier than the next interest payment date, the respondent also incurred a prepayment penalty amounting to $15,570 (“the Prepayment Penalty”).

8 The respondent also incurred the following borrowing expenses in connection with the Syndicated Loan (“the Borrowing Expenses”):

(a)	Underwriting fee (based on 0.875% of $113m) payable to Citicorp Investment Bank (Singapore) Limited (“Citicorp”) which acted as the arranger of the Syndicated Loan	$ 988,750
(b)	Agency fee payable to Citicorp as the agent for the syndicate of lenders	$ 10,000
(c)	Facility fee (based on 0.125% of $113m) payable to Citicorp upon signing of the Syndicated Loan	$ 141,250
(d)	Solicitor’s fees and disbursements in connection with the Syndicated Loan	$ 98,946
(e)	Property Valuer’s fees for valuation of the Land and the Condo Project as required under the Syndicated Loan	$ 23,914
		$1,262,860

9 The Comptroller of Income Tax (“the CIT”) does not dispute that the interest payable under the Syndicated Loan is deductible against the respondent’s taxable income under s 14(1)(a) of the Income Tax Act (Cap 134, 2004 Rev Ed) (“ITA”). The issue in the present proceedings is whether (a) the Borrowing Expenses, (b) the Prepayment Penalty and (c) the Guarantee Expenses (collectively, “the Relevant Expenses”) incurred by the respondent are revenue expenses and deductible against the respondent’s taxable income for certain years of assessment, ie, 1998 and 1999, under ss 14(1) and 15(1)(c) of the ITA.

10 Section 14(1)(a) of the ITA reads as follows:

(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 is satisfied that the interest was payable on capital employed in acquiring the income; …

11 Section 15(1)(c) of the ITA reads as follows:

(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); …

12 The CIT disallowed the respondent’s claims as he took the view that the Relevant Expenses were capital in nature and therefore were not deductible. The respondent appealed to the Income Tax Board of Review (“the Board”), which dismissed the respondent’s appeals.

13 The respondent appealed to the High Court. Woo Bih Li J (“the judge”) found that it was not disputed before the Board that the Syndicated Loan was incurred in the production of income (see generally IA v Comptroller of Income Tax [2006] 1 SLR 821 (“GD”)). The judge found in favour of the respondent as he was of the view that the Borrowing Expenses and Prepayment Penalty were “wholly and exclusively” incurred in acquiring the income under s 14(1) of the ITA. The judge further held that s 15(1)(c) of the ITA did not prohibit the deduction of the Borrowing Expenses and the Prepayment Penalty from the respondent’s taxable income.

14 In relation to the Guarantee Expenses, the judge was of the view that while there was, strictly speaking, no second loan, the bank guarantees amounted to a refinancing which enabled the release of funds to pay the Syndicated Loan. Since the Syndicated Loan was incurred in the production of income, the judge held that it thereby followed that the Guarantee Expenses were deductible under s 14(1) of the ITA.

The nature of the syndicated loan

Introduction

15 In the court below, it was not disputed between the parties that the Syndicated Loan was incurred in the production of income as the Syndicated Loan was used to acquire trading stock and that, therefore, the Borrowing Expenses and the Prepayment Penalty were “wholly and exclusively incurred” in acquiring the income under s 14(1) of the ITA. The only remaining issue before the judge, therefore, was simply whether the Borrowing Expenses and the Prepayment Penalty were prohibited from deduction under s 15(1)(c) of the ITA. However, the judge, following the Singapore High Court decision of T Ltd v Comptroller of Income Tax [2005] 4 SLR 285, held that s 15(1)(c) did not even apply in the first instance as that particular provision applied to the principal loan only and, hence, was not even potentially applicable (in the context of the present proceedings) to the Relevant Expenses. However, we note that the High Court’s decision on the interpretation of s 15(1)(c) of the ITA has since been reversed by the Court of Appeal in T Ltd v Comptroller of Income Tax [2006] 2 SLR 618 (“the T Ltd case”). The Court of Appeal held (at [20]) that:

A plain reading of s 15(1)(c) does not compel us to exclude interest expenditure from its scope. The said provision applies to all capital expenditure. Interest in respect of a capital purpose is capital expenditure and is therefore incurred as a “sum employed or intended to be employed as capital” within the meaning of s 15(1)(c).

The court held, inter alia, that interest was not invariably of a revenue nature. It was derivative in nature and owed its existence to the loan: Hence, its nature was dependent on the nature of the loan which was dependent (in turn) on the purpose of the loan itself. This is an important general principle, to which we shall have recourse in the present proceedings albeit in a somewhat different context. The crucial point to note for the present is that the Court of Appeal in the T Ltd case held that there was, in principle, no reason why interest payments could not, depending on the purpose of the loan to which they were related, be capital in nature – having decided (as just noted) that there was no blanket rule that interest payments would always be revenue in nature.

16 The T Ltd case, in our view, settles the Singapore position vis-à-vis s 15(1)(c), and there is no need to add to the well-reasoned judgment in that case, which was based on first principles – an approach that is particularly important in the context of tax cases, which are (by their very nature) apt to be rather technical in nature to begin with. It is therefore essential to cut through, as it were, the thicket of unnecessary complexity, and focusing on first principles appears to us to be the best approach to adopt. Indeed, this is the general approach which we adopt in the present appeal as well. It is also pertinent to note...