HC and Another v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judge: A V Winslow J
• Judgment Date: 07 August 1970
• Neutral Citation: [1970] SGHC 12
• Date: 07 August 1970
• Subject Matter: Whether transfer was commercial transaction,Whether transfer was for valuable consideration under s 32(1)(a) of the Income Tax Ordinance (Cap 166, 1955 Rev Ed),Revenue Law,Valuation of trading stock on discontinuance or transfer of trade or business,Whether development expenditure and finance charges should be taken into account,Income taxation,Section 32 of the Income Tax Ordinance (Cap 166, 1955 Rev Ed),Trading stock,Company transferring trading stock to parent company
• Docket Number: Income Tax Board of Review Appeal No 11 of 1969
• Published date: 19 September 2003
• Defendant Counsel: Michael Nolan QC and Sat Pal Khattar
• Court: High Court (Singapore)
• Plaintiff Counsel: Michael Kerr QC and M Karthigesu (Allen & Gledhill)

The sole though not so simple question that arises for determination on this appeal is whether the appellants who are joint liquidators of S Park Ltd, to which I shall refer as the company, were correctly charged and assessed to tax by the Comptroller of Income Tax in the sum of $522,116.40, as subsequently confirmed by the Board of Review, by virtue of the provisions of s 32 1(b) of the Income Tax Ordinance (Cap 166) read in conjunction with s 35(5)(a) thereof on the notional income of its principal asset consisting of development land at S Park in Dunearn Road as on 28 December 1963 which is the date of the discontinuance of the trade or business carried on by the company when it went into voluntary liquidation.

Counsel for the appellants submitted that there is no reported decision on the application of s 32 in Singapore since it became part of our law in 1948 or on the application of its equivalent in England or elsewhere. In this I do not think that he is entirely correct, vide Bradshaw v Blunden (HM Inspector of Taxes) (No 2) 39 TC 73, with which I shall deal more fully later in this judgment.

The facts found by the board are not in dispute save in one respect as will appear later. Briefly, the undisputed facts are as follows:

(a) the company was incorporated in November 1961 and, not long afterwards, in pursuit of one of its main objects, purchased over 52 acres of land in Dunearn Road and proceeded to develop it with a view to erecting two-storey bungalows on it for sale to the public;

(b) by 15 August 1963 at least 70 houses were in various stages of construction on this land;

(c) on this date T and C Properties Ltd (hereinafter referred to as T and C), which was incorporated on 24 July 1963 as a private limited company, acquired the whole of the issued share capital of the company comprising 16,000 ordinary shares of $100 each in return for which T and C issued to the shareholders of the company pro rata2,900,000 ordinary shares of $1 each in T and C. On 26 August 1963 T and C went public;

(d) although development by the company of the land ceased between 15 August 1963 and early December 1963 it re-commenced thereafter and continued until 28 December 1963 when the company went into voluntary liquidation as a result of a special resolution passed on that date appointing the present appellants its liquidators. The company accordingly was engaged in its trade or business until that date when the business was discontinued as the board found. A sum of $738,240 was incurred as development expenditure by the company as also was a sum of $58,080 as finance charges;

(e) on 29 August 1964 the land in question was conveyed by the liquidators as `vendors` to T and C as `purchaser` in satisfaction of all the purchaser`s share and interest amounting to the sum of $1,757,900`;

(f) a few days before the company went into liquidation, T and C purchased two further lots of 800 ordinary shares each in the company at a premium of $181.25 per share, the total cost being $290,000;

(g) on the date of discontinuance T and C held 17,579 shares at $100 each in the company out of a total of 17,600 such shares which had been issued up to that date. The remaining 21 shares were held by nominees of T and C;

(h) there was no dispute before me as there was before the board that the land in question was trading stock within the meaning of s 32 of the Income Tax Ordinance and I am including this under the head of undisputed facts although strictly speaking it is also a question of law.

I should mention now, however, a question of fact which is in dispute, iewhether the valuation by the comptroller of this land as trading stock in the sum of $2,291,991 on the date of discontinuance as representing its market value on that date did or did not take into account the development expenditure and finance charges to which I have already referred amounting to a total of $796,320. I shall be dealing with this later as it was the third alternative issue in the contentions of the appellants that, if the property was properly chargeable and assessable to tax under s 32, allowance should have been made for this expenditure in the computation of tax.

Counsel for the appellants submitted that there were three issues for determination by me on this appeal as follows:

I - as set out in para 1(c) & (d) and para 3(viii) of the petition of appeal, viz:

(c) that the company in law and in fact had made no profit on the land, Lot 230 Mukim XV;

(d) that the transaction was a mere transfer back by the company (a wholly owned subsidiary of T and C) to T and C (the parent company of the company) and was thus not a commercial transaction;

3(viii) that the board erred in law in failing to differentiate between capital realisation and commercial transactions. The act of the liquidators was one of capital realisation. The board should have followed the cases relied on by the petitioners/appellants, namely, Wilson Box (Foreign Rights) Ltd v Brice[1936] 3 All ER 728; Baker v Cook[1937] 3 All ER 509 and Tebrau (Johore) Rubber Syndicate Ltd v Farmer TC 658. The board should not have followed Orchard Parks Ltd v Pogson TC 442.

Alternatively,

II - as set out in para 3(ix), viz:

3(ix) That the alleged trading stock, iethe land and premises in question should have been valued under s 32(1)(a) of the Income Tax Ordinance, 1966, in the sum of $1,757,900 and not under para (b) of this section.

III - as set out in para 3(x) viz:

3(x) That the development expenditure of $738,240 and the finance charges of $58,080 relating to the land and premises should in any event have been taken into account in the computation of the assessment to tax.

With regard to the first issue, the appellants` contentions, briefly, were that the company made no actual gain or profit on the transfer of the land in 1964 which was only an act of capital realisation, that there was no chargeable income as such, and that s 32 had no application being only a valuation section and not a charging section.

It may be useful at this stage for me to set out the provisions of s 32(1):

Valuation of 32(1) In computing for any purpose of

trading stock this Ordinance the gains or profits of a

on discontinuance trade or business which has been dis-

or transfer of continued or transferred, any trading

trade or business. stock belonging to the trade or business

at the discontinuance or transfer thereof shall be valued

as follows:

(a) in the case of any such trading stock

(i) which is sold or transferred for valuable consideration to a person who carries on or intends to carry on a trade or business in Singapore; and

(ii) the cost whereof may be deducted by the purchaser as an expense in computing for any such purpose the gains or profits of that trade or business,

the value thereof shall be taken to be the amount realized on the sale or the value of the consideration given for the transfer;

(b) in the case of any other such trading stock, the value thereof shall be taken to be the amount which it would have realised if it had been sold in the open market at the discontinuance or transfer of the trade or business.

With regard to the second issue, counsel for the appellants submitted that, if the first issue failed, then alternatively, the second issue would arise for consideration, viz that the trading stock in question had been transferred for valuable consideration to T and C who were carrying on a similar trade or business in Singapore and that the value thereof should be computed in accordance with the provisions of s 32(1)(a) of the Ordinance, ie the actual value of the consideration given for the transfer which, according to the appellants, amounted to $1,757,900 being the consideration stated in the conveyance of 29 August 1964 by the liquidators as vendors to T and C as purchaser.

The comptroller of course had made his valuation of the trading stock in question under the provisions of s 32(1)(b) and he considered that the property fell to be valued at its market value on the date of discontinuance, ie28 December 1963. The board upheld this view on the ground that para (b) clearly states that the value of any trading stock not falling within para (a) shall be taken to be the amount which it would have realised if it had been sold in the open market at the discontinuance of the trade or business. It is not disputed that no actual gain or profit was made on that date because no sale or transfer for valuable consideration took place then. It was contended for the comptroller therefore that gains or profits of the trade or business which had been discontinued had to be computed on its notional gains or profits had the property been sold in the open market on that date.

I have since writing the foregoing part of this judgment received written submissions from both counsel on the appeal summarising their previous contentions which I asked them to submit as a precaution against any possible error in my notes of argument as to what they had actually said in their oral submissions. I expected these written submissions to be made in a much more concise form. Counsel have, however, chosen to set them out almost as fully as they were argued in open court and for this I am grateful. I shall refer to these written submissions as `AWS` (for the appellants) and `RWS` (for the respondent) respectively in the course of this judgment.

I never had much doubt at the conclusion of the hearing last April what my final decision on this appeal would be. Out of deference, however, to the fact that eminent counsel had been specially imported at some expense from England whence most of our laws stem to argue this appeal largely on a question of law of some importance (if only for its novelty) to say nothing of the magnitude of the sum involved in this controversy, I reserved judgment and...