IA v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judge: Wong Keen Onn
• Judgment Date: 14 October 2004
• Neutral Citation: [2004] SGDC 252
• Published date: 25 May 2005
• Court: District Court (Singapore)
• Plaintiff Counsel: Teoh Lian Ee and Stacy Choong (Drew and Napier LLC)
• Defendant Counsel: Liu Hern Kuan and David Lim

[EDITORIAL NOTE: The details of this judgment have been changed to comply with s 83(3) Income Tax Act (Cap 134, 2004 Rev Ed)]

14 October 2004

District Judge Wong Keen Onn (Chairman)

Tan Soo Nan (Member)

Theresa Foo (Member)

Background

1 This is an appeal by the IA (the Appellants) against the Comptroller of Income Tax (Respondent’s) Notice of Assessment (Additional) dated 12 May 1999 for the Year of Assessment 1998 and a Notice of Assessment 1998 in which the Comptroller of Income Tax disallowed the deduction of the expenses relating to bank guarantee and security fees expenses amounting to $1,262,860 in respect of borrowing expenses, $15,569 in respect of prepayment penalty and $2,998,783 in respect of guarantee expenses.

2. By a Notice of Assessment (Additional) dated 5 October 2000 for the Year of Assessment 1999 and a Notice of Assessment (Additional) dated 2 August 2001 for the Year of Assessment 1998, the Comptroller of Income Tax disallowed the deduction of such expenses under s 15(1)(c) of the Income Tax Act on the ground that expenses in connection with the loans were capital in nature as the loans were capital sums.

3. The Comptroller of Income Tax issued its formal Notices of Refusal to Amend the assessment in respect of each of the Years of Assessment for 1998 and 1999 on 8 March 2002. It is in consequence of these Notices of Refusal to Amend that the Appellant on 14 March 2002 filed with the Income Tax Board of Review the Notices of Appeal under s 79(1) of the Income Tax Act. The appeal was heard by the Board on 14, 15, and 16 June 2004 , 27 July 2004 and 14 October 2004.

Facts

4. For the purpose of the appeal, the parties agreed to the facts as stated in the 2 agreed statement of facts, Exhibit ASOF-1 and Exhibit ASOF-2. The pertinent facts of this case are as follows:

1. The Appellant is a company incorporated in Singapore on 5 April 1993 as a wholly-owned subsidiary of B for the purpose of developing a condominium project (‘the [xxx] Condo Project’) comprising approximately of 1100 units. On 31 May 1993, the Appellant entered into a building agreement with the President of the Republic of Singapore (‘the President’) to acquire the URA land parcel [xxx] at [xxx] property to develop and sell units for the [xxx] Condo Project (see ASOF-1 para 2, 4 and 6, Exhibits AB2, AB3 and AB4). The Appellant’s paid-up capital was $77,111,750 comprising of 77,111,750 shares at $1.00 each. In order to develop the [xxx] Condo Project, the Appellant obtained a Syndicated Loan for facilities (‘the Facilities’) totaling $113m. (see ASOF-1 para 5)

2. The purchase price (including the incidental costs/ expenses/ fees and stamp duty) incurred in connection with the purchase of the [xxx] Land was approximately S$166,181,206 (see Note 3 of the Notes to the Appellant’s Accounts for year ended 30 Sep 1995 (on page 11), attached as Exhibit AB 5) and the total costs of constructing the apartment units in the [xxx] Condo Project (including property taxes, interest and other overheads) amounted to approximately S$237,000.00 (see note 4 of the Notes to the Appellant’s Accounts for year ended 30 Sep 1998 (on page 13), attached as Exhibit AB 6). The total costs of purchasing the [xxx] Land and developing the [xxx] Condo Project therefore amounted to approximately S$403 million (“Total Purchase & Development Cost”).

3. It is not disputed by the Respondent Comptroller of Income Tax (“CIT”) that the [xxx] Land and units of the [xxx] Condo Project formed part of the Appellant’s trading stock. Accordingly, the proceeds arising from the sale of such units were consistently reported to tax as the Appellant’s business/trading income and taxed as such (see ASOF 1 para 3 and AB 37).

4. On 27 May 1993, the Appellant obtained a loan of S$113 million from a syndicate of banks (the “Syndicated Loan” – see ASOF para 7 and 8 and AB11) to finance part of the purchase price of the [xxx] Land and the development costs of the [xxx] Condo Project. The Syndicated Loan of S$113,000,000 comprised a land loan of S$88,000,000 (the “Land Loan”), a construction loan of S$20,000,000 (the “Construction Loan”) and an overdraft facility of S$5,000,000 (the “OD Facility”).The total purchase and development costs of the [xxx] Land and the [xxx] Condo Project amounted to approximately S$403 million. The interest rates payable on the Syndicated Loan ranged from between 4.3834% to 6.25% for the relevant years. The total amount drawn down by the Appellant just prior to its full repayment of the Syndicated Loan on 14 October 1994 was S$97,553,368.59 (of which approximately S$88,000,000 was the Land Loan, S$4,000,000 was the Construction Loan and S$5,000,000 was the OD facility).

5. The Syndicated Loan Agreement expressly provided that the loan proceeds therefrom could only be used to finance the purchase of the [xxx] Land and pay for certain stated development costs in connection with the [xxx] Condo Project (see Clause 1.08 and Schedule 8 of the Syndicated Loan exhibited as AB11). The Appellant was therefore only allowed to use the loan proceeds to finance the purchase and development of its trading stock and not for any other purposes (see ASOF para 11, 12 and 13). The evidence-in-chief adduced by the Appellant’s witness AW1 shows that the loan monies were in fact used to finance the purchase and development of the Appellant’s trading stock (i.e. the [xxx] Land and the apartments in the [xxx] Condo Project)

6. The total amount of interest payable under the Syndicated Loan for the Appellant’s financial year 1994 alone was approximately S$4.9 million (see ASOF para 16). The CIT does not dispute that such interest incurred by the Appellant in connection with the borrowed monies from the Syndicated Loan (which were used to finance the purchase and development of the Appellant’s trading stock i.e. the [xxx] Land and apartments in the [xxx] Condo Project) was deductible against the Appellant’s taxable income under section 14 read with section 15 of the Income Tax Act (“ITA”).

7. The Appellant also incurred the following borrowing expenses in connection with the Syndicated Loan (collectively referred to as “Borrowing Expenses”) (see ASOF para 35):-

7.1.1 Underwriting Fee in the amount of S$988,750 (based on 0.875% of S$113 million) payable to C which acted as the arranger for the Syndicated Loan facility (see AB 33);

7.1.2 Agency Fee in the amount of S$10,000 payable to C as the agent for the syndicate of lenders under the Syndicated Loan facility (see AB 32);

7.1.3 Facility Fee in the amount of $141,250 (based on 0.125% of S$113 million) payable to C upon signing of the Syndicated Loan (see AB 33);

7.1.4 Solicitors’ Fees and Disbursement in connection with the Syndicated Loan in the amount of S$98,946 (see AB 28 and AB 29); and

7.1.5 Property Valuer’s Fees in the amount of S$23,914 (for preparing valuations of the [xxx] Land and the [xxx] Condo Project as required under the Syndicated Loan) (see AB 30 and AB 31).

Bank Guarantee to release the proceeds in the Project Account

8. As of 30 September 1994, the Appellant had revenue receipts amounting to approximately S$170 million from progress payments made by purchasers of the apartments in the [xxx] Condo Project. These sums (which were more than sufficient to repay the entire outstanding amount under the Syndicated Loan) were quarantined in the URA Partial Waiver Bank Account (hereinafter referred to as the “Project Account”) and they could only be withdrawn if the Appellant furnished a banker’s guarantee of an amount equivalent to the amount to be withdrawn to URA (see ASOF-1 paras 18 and 22 to 25).

9. The Appellant wrote to the URA on 19 September 1994 proposing to provide a bank guarantee for the amount of S$100,000,000 in consideration of URA agreeing to let the Appellant withdraw S$100,000,000 from its URA Partial Waiver Bank Account to repay the Syndicated Loan before the issuance of the TOP (The Appellant’s letter to the URA dated 19 September 1994 is exhibited as AB 16). By letter dated 4 October 1994, the URA agreed to the Appellant’s proposal. (URA’s letter to the Appellant dated 4 October 1994 is exhibited as AB 17).

10. In order to be released from its obligation to pay the substantial amounts of interest under the Syndicated Loan, the Appellant obtained on 13 October 1994, the Bank Guarantees for an aggregate sum of S$100 million in order to secure the release of S$100 million from the Appellant’s Project Account. (see ASOF-1 paras 26 to 29). On 14 October 1994, the sum of S$97,553,368.59 outstanding under the Syndicated Loan was repaid by the Appellant using the S$100,000,000 withdrawn from its URA Partial Waiver Bank Account (Letter for the Appellant to C dated 13 October 1994 is exhibited as AB 22).

11. In connection with the early repayment of the Syndicated Loan, the Appellant incurred a prepayment penalty amounting to S$15,570 (the “Prepayment Penalty”) under the Syndicated Loan (see ASOF para 35(vi) and Clauses 2.11 and 3.13 of the Syndicated Loan exhibited as AB 11).

12. In order to withdraw the monies from the Project Account, the Appellant had to incur the following expenses in connection with the Bank Guarantees (collectively referred to as the “Guarantee Expenses”) (see ASOF para 30 to 34):-

12.1.1 Aggregate bank commission in the amount of S$2,605,750 for 3 years (based on the interest rate of 0.875%)( see AB36A and AB36B of Exh ABD-1);

12.1.2 Aggregate agency fees in the amount of S$383,100 for 3 years (based on the interest rate of 0.125%)( see AB24, AB25 and AB26 of Exh ABD-1; and

12.1.3 Solicitors’ fees and disbursements in the amount of S$9,933.15 (AB27 of Exh ABD-1).

13. The total amount of the Bank Guarantee commission and agency fees paid by the Appellant were much lower than the estimated interest payable of around S$11,000,000 under the Syndicated Loan for the period from 15 October 1994 to the issuance of TOP in November 1996. (Please refer to paragraph 22).

14. As...