Comptroller of Income Tax v BBO

• Jurisdiction: Singapore
• Judge: Sundaresh Menon CJ
• Judgment Date: 04 February 2014
• Neutral Citation: [2014] SGCA 10
• Court: Court of Appeal (Singapore)
• Docket Number: Civil Appeal No 58 of 2013
• Published date: 07 May 2014
• Year: 2014
• Hearing Date: 17 October 2013
• Plaintiff Counsel: Foo Hui Min, David Lim and Vikna Rajah (Inland Revenue Authority of Singapore)
• Defendant Counsel: Tan Kay Kheng, Tan Shao Tong, Novella Chan and Jeremiah Soh (Wong Partnership LLP)
• Subject Matter: Revenue Law,Income Taxation
• Citation: [2014] SGCA 10

Andrew Ang J (delivering the judgment of the court):

This is an appeal under s 81(5) of the Income Tax Act (Cap 134, 2008 Rev Ed) (“the ITA”) against the decision of the High Court judge (“the Judge”) dismissing the appeal of the appellant Comptroller (“the Appellant”) against the decision of the Income Tax Board of Review (“the Board”) in Income Tax Appeal Nos 3 and 4 of 2010. The Board had allowed the appeal of the respondent insurance company (“the Respondent”) against revised assessments raised on it by the Appellant seeking to tax the gains made by the Respondent on the disposal of certain shares (“the Shares”) that had been held by the Respondent in its related companies [C], [D] and [E].

The significance of this case lies to some degree in the fact that it is the first local case dealing with the income tax treatment of investment gains accruing to insurance companies. At its core it revolves around the single issue of whether the gains arising from the Respondent’s disposal of the Shares were revenue or capital in nature (and hence whether they were liable to be taxed as income). The Appellant submits that the Shares were held as assets of the Respondent’s insurance business in its insurance funds at the time of disposal and that the gains therefrom were therefore in the nature of income. The Appellant’s arguments (at least on appeal) are based, in large part, on the fact that the Shares were held by the Respondent in statutorily mandated insurance funds and were used to meet the Respondent’s solvency margins as prescribed by legislation. In rebuttal, the Respondent argues that insurance companies, like all other companies, are not precluded from holding shares as capital assets, the disposal of which would give rise to capital gains. In particular, the Respondent submits that the Shares were held by it as part of a corporate preservation strategy rather than for the purposes of trade.

This appeal raises, inter alia, interesting questions as to the singular nature of insurance companies as enterprises to which investment activities are central (if not crucial), the impact of this on their consequent tax treatment and the relevance of the overarching regulatory regime to the entire enquiry.

Facts

The Respondent is a company registered in Singapore and is part of the [C] Group of companies. It carried on the business of a general insurer in Singapore and was registered under the Insurance Act (Cap 142, 2002 Rev Ed) (“the Insurance Act”) until December 2009. Under the provisions of the Insurance Act, an insurer is required to establish separate insurance funds for each class of insurance business and to ensure that all assets, receipts, liabilities and expenses are properly attributed to the relevant fund. Pursuant to s 17(1) of the Insurance Act, the Respondent therefore established the Singapore Insurance Fund (“SIF”) and the Offshore Insurance Fund (“OIF”) in respect of its Singapore and overseas policies respectively. The Respondent used the SIF to invest in [C] shares, and used the OIF to invest in [C], [D] and [E] shares. In the years of assessment (“YA”) 1973, 1976, 1980–1981, 1984–1986, 1988 and 1995, the Respondent sold some of the Shares and reported the gains as taxable income.

On 29 June 2001, a hitherto unrelated company, [F], made a general offer for the shares of [C] at a consideration of $4.02 in cash and 0.52 [F] share for each [C] share held (“the Takeover Offer”), which offer received the requisite acceptances of [C’s] shareholders to become unconditional. In response to the Takeover Offer, the Respondent sold to [F] its entire holding of [C] shares amounting to 13,459,214 shares in exchange for $54,106,040 in cash and 6,998,791 [F] shares. The Respondent also sold, in 2002, its portfolio of [D] and [E] shares in the OIF, amounting to 3,308,000 and 6,000 shares respectively, in exchange for $16,669,280 in cash. The Respondent thereby made gains of $89,246,800 from the sale of [C] shares, $7,934,100 from the sale of [D] shares, and $1,452,480 from the sale of [E] shares. All in all, the Shares amounted to some 36% of the total value of the SIF and the OIF.

The Appellant took the view that the gains made by the Respondent were taxable and issued revised assessments for YA 2002 and YA 2003 to the Respondent. On 15 April 2010, in response to the Respondent’s request for amendment, the Appellant issued to the Respondent a Notice of Refusal to Amend the Assessments for YA 2002 and YA 2003.

On 19 April 2010, the Respondent filed Notices of Appeal against the Appellant’s revised assessments for both YA 2002 and YA 2003. By way of a decision dated 20 June 2012 (“the Board Decision”), the Board allowed the appeals. The Appellant then appealed against the Board Decision to the High Court under s 81(2) of the ITA by way of Originating Summons No 681 of 2012 (“OS 681/2012”), which appeal was dismissed by the Judge in a decision dated 8 April 2013 (“the Judgment”). On 7 May 2013, the Appellant filed a Notice of Appeal against the decision of the Judge.

Summary of Pleadings

In OS 681/2012, the Appellant appealed on the grounds that: The Board erred in law when it did not take into account the extensive case law indicating that the gains or profits of an insurance company from the sale of its investments are revenue in nature and hence taxable; The Board erred in law in that it did not treat the gains or profits from the sale of share investments by the Respondent as being taxable under s 26 of the ITA; The Board erred in fact and law in that it did not recognise that the Shares were the trading stock (rather than the capital) of the Respondent, taking into account: The manner in which the Shares were previously held for the purposes of the insurance business of the Respondent; and The fact that the Respondent had previously, of its own accord, brought to tax the gains from the sale of the same counters of share investments. The Board erred in fact and law when it held that the gains or profits derived by the Respondent from the sale of the Shares were capital in nature and not taxable.

Decision below

Before the Board and the Judge, the Appellant advanced two separate arguments: That the profits made were profits falling with s 10(1)(a) of the ITA as “income … in respect of gains or profits from any trade [or] business”; and That the profits were, in any event or inferentially, to be brought to assessment by the terms of ss 26(3) and 26(4) of the ITA.

The separate argument referred to above at [9(b)] is no longer being pursued. The sole issue on appeal is therefore whether the gains derived from the disposal of the Shares were “income … in respect of gains or profits from any trade [or] business”.

The Board held, inter alia, that: Profits from the sale of investments by insurance companies (other than life insurance companies) were not automatically liable to tax under ss 26(3) and (4) of the ITA; The real question was whether the Respondent’s gains from the sale of the Shares amounted to trading or business profits, which would then be taxable under s 10(1)(a), or whether they were in the nature of capital gains and hence not exigible to tax; The Respondent had not engaged in any trade or business in the transaction of the Shares and the profits from the sale of the Shares ought to be treated as capital gains. Specifically: The Shares were held for the long-term strategic purpose of preserving the corporate structure of the [C] Group; The Shares were held for a long time and this supported the argument that the Shares were acquired for a long-term strategic purpose; The Shares were not previously sold by the Respondent to meet its offshore claim liabilities; Those of the Shares which the Respondent sold were sold to other companies within the [C] Group, which further reinforced the corporate preservation policy; and As [E] was not a listed company, the case in relation to the gains and profits derived by the Respondent from the sale of the [E] shares being capital gains was even stronger. The Board came to its conclusion after examining the facts and evidence available, including the oral testimonies of the Respondent’s two witnesses.

The Judge affirmed the Board’s findings of fact. In particular, the Judge examined the present facts with reference to the so-called “badges of trade” in order to determine if the gains from the sale of the Shares were income in respect of gains or profits from the Respondent’s trade or business: In relation to the motive of the taxpayer, the Judge found that the Respondent’s intention in holding the Shares was to promote the long-term strategic interests of itself and the [C] Group. This was manifested in various ways: There were cross-holdings of shares and cross-directorships between the companies within the [C] Group; The corporate preservation strategy of the [C] Group also involved the holding of shares of companies in the group by [QR], a company controlled by the founder of [C] and his family; The regular reports and updates on the status of cross-holdings of various companies in the [C] Group and [QR] were generated to enable the Senior Management of [C] to monitor and ensure that the shareholding of the companies in the [C] Group was not diluted and that effective control was maintained to minimise the possibility of a hostile takeover; Any decision to sell any shares or rights in the companies within the [C] Group was closely scrutinised and reviewed. Specifically, the Respondent was not allowed to sell any of its shares or rights in the companies within the [C] Group without the requisite approval from [C]; The Shares were passively held by the Respondent and were not managed by the Respondent’s fund manager; and The Shares of [E], a non-listed company, were not readily realisable. Therefore, the Board was correct in finding that there was a strong case for...