IA v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judge: Woo Bih Li J
• Judgment Date: 22 December 2005
• Neutral Citation: [2005] SGHC 229
• Date: 22 December 2005
• Subject Matter: Whether expenses capital in nature,Deduction,Revenue Law,Taxpayer incurring borrowing expenses, prepayment penalty and guarantee expenses relating to financing loan,Taxpayer seeking to deduct expenses against taxable income for years of assessment,Whether expenses deductible against taxpayer's taxable income for years of assessment,Income taxation,Sections 10(1)(a), 14(1), 14(1)(a), 15(1)(c) Income Tax Act (Cap 134, 2004 Rev Ed)
• Docket Number: District Court Appeal No 30 of 2004
• Published date: 23 December 2005
• Defendant Counsel: Liu Hern Kuan and David Lim (Inland Revenue Authority of Singapore)
• Court: High Court (Singapore)
• Plaintiff Counsel: Teoh Lian Ee and Stacy Choong (Drew and Napier LLC)

22 December 2005 Judgment reserved.

Woo Bih Li J:

Background

1 This is an appeal by a taxpayer company (“IA”) against the decision of the Income Tax Board of Review (“the Board”) dated 14 October 2004 in Income Tax Board of Review Appeal Nos 6 and 7 of 2002.

2 IA was incorporated as a property development company with a paid-up capital of $77,111,750. It purchased a parcel of land in the east of Singapore (“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.

3 IA had obtained a loan of $113m from a syndicate of banks (“the Syndicated Loan”) to finance the purchase price of the Land and the development costs of the Condo Project. The interest rates payable on the Syndicated Loan ranged from between 4.3834% to 6.25% for the relevant years. 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 of the Land and pay for certain development costs in connection with the Condo Project. It was undisputed that the Syndicated Loan was in fact used to finance the purchase of the Land and certain development costs. The Syndicated Loan was to be repaid 48 months from the date of first drawdown of the land loan component or 30 June 1997, whichever was earlier, but there was provision to allow early repayment.

4 The total amount of interest payable under the Syndicated Loan for IA’s financial year 1994 alone was approximately $4.9m. The Comptroller of Income Tax (“CIT”) does not dispute that interest is deductible against IA’s taxable income under s 14(1)(a) of the Income Tax Act (Cap 134, 1994 Rev Ed) (“ITA”).

5 IA 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

6 As at 30 September 1994, IA had revenue receipts amounting to approximately $170m from progress payments made by purchasers of the apartments in the Condo Project. This sum, which was more than sufficient to repay the entire outstanding amount under the Syndicated Loan, 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). At that time, it could only be withdrawn if IA furnished a bank guarantee to the Urban Redevelopment Authority (“URA”) for an amount equivalent to the amount to be withdrawn.

7 On 13 October 1994, IA obtained two bank guarantees for an aggregate sum of $100m to secure the release of $100m from the Project Account which was used to pay the Syndicated Loan earlier than the due date for payment. This released IA from its obligation to pay substantial interest under the loan. IA said it achieved interest savings of approximately $8m from this exercise.

8 As the Syndicated Loan was repaid on a date earlier than the next interest payment date, IA incurred a prepayment penalty amounting to $15,570 (the “Prepayment Penalty”).

9 In order to obtain the bank guarantees, IA incurred the following expenses (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

10 IA claimed deductions under s 14(1) of ITA for (a) the Borrowing Expenses, (b) the Prepayment Penalty and (c) the Guarantee Expenses (collectively, the “Relevant Expenses”) against its taxable income for certain years of assessment, ie, 1998 and 1999. The claims were disallowed by CIT who took the view that the Relevant Expenses were capital in nature and therefore were not deductible. IA then appealed to the Board which dismissed IA’s appeals. IA then appealed to the High Court.

Relevant provisions in the ITA

11 The provisions in the ITA which are relevant in the present case are ss 10(1)(a), 14(1), 14(1)(a) and 15(1)(c).

12 Section 10(1)(a) of the ITA provides that:

10—(1) Income tax shall, subject to the provisions of this Act, be payable at the rate or rates specified hereinafter for each year of assessment upon the income of any person accruing in or derived from Singapore or received in Singapore from outside Singapore in respect of—

(a) gains or profits from any trade, business, profession or vocation, for whatever period of time such trade, business, profession or vocation may have been carried on or exercised.

13 Sections 14(1) and 14(1)(a) of the ITA provide that:

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 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. [emphasis added]

14 Section 15(1)(c) of the ITA provides that:

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).

The Borrowing Expenses

15 It was not disputed by CIT that the Land and the apartments of the Condo Project formed part of IA’s trading stock. This was part of the agreed facts before the Board. Before me, CIT initially also agreed that the Syndicated Loan was to acquire trading stock. However, subsequently, while Mr Liu Hern Kuan, counsel for CIT, was taking the position that the Syndicated Loan added to the capital of IA, Mr Liu sought to retreat from the position that the loan was to acquire trading stock. Bearing in mind the agreed facts before the Board, I am of the view that it is not open to CIT to suggest that the Syndicated Loan was not to acquire trading stock. Whether the Borrowing Expenses are in the circumstances of the case capital or revenue is another matter.

16 The Board said that it was not in dispute that the Syndicated Loan was incurred in the production of income and that, therefore, the Borrowing Expenses were “wholly and exclusively incurred” in acquiring the income under s 14(1) of the ITA. The issue was whether the Borrowing Expenses were prohibited from deduction under s 15(1)(c) of the ITA. I add that the Board treated the Prepayment Penalty as being of the same nature as the Borrowing Expenses (see [51] of the Board’s Grounds of Decision). In reaching its conclusion, the Board placed much reliance on English cases on the rationale that s 15(1)(c) of the ITA is based on the English Rule 3(f) applicable to Cases I and II of Schedule D of the Income Tax Act, 1918, (“Rule 3(f)”). Rule 3(f) states:

In computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of … any sum employed or intended to be employed as capital …

17 In EJ Bridgwater and WH Bridgwater v King (HM Inspector of Taxes (1943) 25 TC 385 (“Bridgewater”), the appellants carried on business as public works contractors and land and estate developers. As developers, the appellants purchased lands which they developed by constructing roads and sewers and selling plots as building sites. For the purpose of purchasing and developing an estate, the appellants borrowed ₤15,000 with interest at 5% per annum and ₤6,500 payable by way of premium or bonus. Subsequently, as the lender was anxious to obtain repayment, it agreed to accept repayment with a reduced premium of ₤4,000 instead of the ₤6,500. The Special Commissioners decided that the ₤4,000 was not a proper deduction under Rule 3(f). Macnaghten J decided that there was ample evidence to support the decision of the Special Commissioners as the loan was not of a temporary character.

18 The emphasis on the distinction between a fluctuating temporary loan and a loan on a permanent footing appears to have stemmed from Farmer (Surveyor of Taxes) v Scottish North American Trust, Limited [1912] AC 118, 5 TC 693. There, Lord Johnston said in the Court of Session at 5 TC 693 at 698:

It may be well said that if money is borrowed on a permanent footing, as from year to year, the capital of the concern is in a commercial sense enlarged thereby, and the business extended, whereas no commercial man would consider that his banking facilities were part of his capital, or the consideration he paid for them anything but an expense of his business.

19 In the House of Lords, Lord Atkinson said ([1912] AC 118 at 127, 5 TC 693 at 707):

These authorities show that money borrowed by such a Company as the Appellant Company in this case in the fluctuating temporary manner in which it has been borrowed by them – the daily borrowing and lending of money being part of their trade and business – is not to be treated under the Joint Stock Companies Act as “capital”. There is nothing to show that the word should bear a different meaning in the Income Tax Acts...