JD Ltd v Comptroller of Income Tax

• Judge: Chao Hick Tin JA
• Judgment Date: 02 December 2005
• Neutral Citation: [2005] SGCA 52
• Subject Matter: Proceedings before Income Tax Board of Review and High Court on income taxation matter held in camera,Whether whole of interest expenses deductible against total dividend income where some shareholdings not income-producing,Whether appropriate to rely on foreign tax legislation and foreign decisions interpreting such legislation as aids to interpretation of local tax legislation,Courts and Jurisdiction,Revenue statutes,Sections 10(1)(d), 10E, 14(1) Income Tax Act (Cap 134, 2004 Rev Ed),Taxpayer seeking to deduct all interest expenses against dividend income received,Income taxation,Taxpayer incurring interest expenses in financing purchase of share investments,Court of appeal,Revenue Law,Comptroller of Income Tax refusing deduction of interest expenses attributable to non-income-producing share investments,Statutory Interpretation,Whether legal basis existing for similar proceedings in Court of Appeal to be held in camera,Deduction,Only certain share investments producing dividend income
• Plaintiff Counsel: Leon Kwong Wing and Chee Fang Theng (KhattarWong)
• Published date: 12 February 2014
• Defendant Counsel: Liu Hern Kuan and David Lim (Inland Revenue Authority of Singapore)
• Court: Court of Three Judges (Singapore)

2 December 2005 Judgment reserved.

Yong Pung How CJ (delivering the judgment of the court):

1 This is an appeal by the taxpayer company against the judgment of the High Court in [2005] SGHC 92 dismissing its appeal against the decision of the Income Tax Board of Review (“the Board”) in [2004] SGDC 245. The Board had affirmed an assessment of the Comptroller of Income Tax (“the Comptroller”), who had disallowed the deduction of interest expenses incurred in relation to non-income-producing share investments. We agree with the decision of the judge below and accordingly dismiss the appeal. We now set out our reasons.

Background

2 The appeal, as was the case before the Board and the court below, is based on an Agreed Statement of Facts. The facts have been duly amended pursuant to s 83(3) of the Income Tax Act (Cap 134, 2004 Rev Ed) (“the Act”) so as not to disclose the identity of the taxpayer.

3 The taxpayer is an investment holding company listed on the Singapore Stock Exchange. It focuses on making long-term share investments. During the years of assessment 1985 to 1996 (“the years of assessment in dispute”), the taxpayer received, as its only income, dividends from long-term share investments held in various subsidiary and associated companies.

4 The taxpayer financed the purchase of the share investments by either (a) obtaining overdrafts and loans from banks and related companies at varying interest rates, or (b) issuing its own shares or obtaining interest-free loans from related companies. These funds were mixed and banked into the same account. The funds were utilised not only for the acquisition of the taxpayer’s share investments but also for its re-financing of earlier loans and the making of advances to related companies.

5 Some of the companies in which the taxpayer had shareholdings did not declare dividends for the entire duration of the years of assessment in dispute. Various other companies also did not declare dividend income for certain of those years of assessment in dispute. The taxpayer was assessed on the basis that only interest expenses attributable to shareholdings which produced income were deductible. Interest expenses attributable to non-income-producing shareholdings were not allowed for deduction.

6 The taxpayer, objecting to the Comptroller’s method of assessment, appealed to the Board on two main issues. This court, however, as was the court below, is only concerned with the issue relating to the disallowance of interest expenses, that is: If interest expenses are incurred to maintain a portfolio of share investments in which some share investment counters do not yield dividend income, is the entire sum of interest expenses deductible, or are only those interest expenses attributable to the income-producing share investment counters deductible?

7 Both the taxpayer and the Comptroller agreed to the application of the Total Assets Formula (“the Formula”) in determining the amount of interest expenses applicable. Where they differed, however, was in the application of the Formula to the facts. This is indicated in the following table:

Total Assets Formula

A x I; C	A (Taxpayer’s basis)	Cost of all share investments financed by interest-bearing funds for each year of assessment in dispute.
	A (Comptroller’s basis )	Cost of all income-producing share investments financed by interest-bearing funds for each year of assessment in dispute.
	C	Total cost of assets as at balance sheet date which were financed by interest-bearing funds for each year of assessment in dispute.
	I	Total interest expenses incurred by taxpayer for each year of assessment in dispute.

8 The taxpayer was of the view that the interest expenses incurred in the obtaining and servicing of loans to acquire its whole basket of share investments was the cost of earning the dividend income received. It contended that all the share investment counters formed a single source of income so that the dividend income received should be assessed as a whole. The taxpayer consequently sought to deduct all interest expenses incurred in respect of the borrowings against the entire sum of dividend income earned from its investments portfolio.

9 The Comptroller, on the other hand, regarded each share investment counter as a separate source of income and allowed deductions of interest expenses only for those shareholdings which produced dividend income at any time during the years of assessment in dispute. The Comptroller thus aggregated the interest expenses incurred only in respect of the income-producing share investment counters to determine the total amount of deductible expenses for the particular year of assessment. This figure was then used in determining the chargeable income for that year of assessment.

10 Due to the difference in approach, the taxpayer’s aggregate chargeable income for the years of assessment in dispute as computed by the Comptroller was $83,484,337 whereas the figure as computed by the taxpayer was $74,694,762. The amount of tax in dispute was $2,497,841.74.

11 The difference in positions taken by the taxpayer and the Comptroller stems from their disagreement as to the interpretation of the meaning of “source” (of dividend income) and of the deductibility provision under the Singapore scheme of taxation. The relevant provisions for present purposes are ss 10(1)(d), 14(1) and 14(1)(a) of the Act. Unless otherwise stated, we have used the 2004 revised edition of the Income Tax Act for ease of reference, as the text of the sections under review is the same as that of the previous editions in use during the years of assessment in dispute. The sections are set out below:

Charge of income tax

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 —

…

(d) dividends, interest or discounts;

…

Deductions allowed

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 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;

…

[emphasis added]

12 The Board interpreted “source” in s 14(1) according to its natural or ordinary meaning of “channel or stream of income”. Therefore, the Board regarded dividends from each of the different share investment counters as constituting a separate and distinct source of income for the purposes of deduction. This was consistent with the principle that s 14(1)(a) required a direct nexus between the expenses incurred and the income produced. The Board, having also found the Formula to be legally tenable and to have been reasonably applied on the facts, upheld the Comptroller’s position to disallow the deduction of interest expenses attributable to non-income-producing share investment counters. The judge below affirmed the Board’s reasoning and decision.

13 In the present appeal, counsel for the taxpayer and the Comptroller made various submissions on whether ss 10(1)(d), 14(1) and 14(1)(a) entitled the Comptroller to treat the share investment counters as individual sources of income for the purposes of deduction. In addition, the taxpayer contended that the subsequent inclusion of s 10E in the Act, which expressly permits the Comptroller to differentiate between income-producing and non-income-producing share investment counters for the purposes of deduction of expenses incurred, must have meant that before its inclusion, such differentiation was not allowed under the Act. The taxpayer also argued that the situations where expenses were not deductible were confined only to cases where the expenses were incurred in the gaining of tax-exempt income or where the investment itself had been extinguished.

The issues

14 The issues we are concerned with in this appeal are therefore:

(a) whether ss 10(1)(d), 14(1) and 14(1)(a) of the Act entitle the Comptroller to treat the share investment counters as individual sources of income for deduction purposes. In particular:

(i) what is the meaning of “source” in s 14(1)?

(ii) what is the correct statutory interpretation of “in the production of the income” in s 14(1)?

(iii) whether the Comptroller exercised his administrative discretion properly;

(b) whether s 10E of the Act is intended to be a declaration of the law as it has been or a change in the law; and

(c) whether the situations where expenses are not deductible are confined only to those where expenses are incurred in the obtaining of tax-exempt income or where the investment itself has been extinguished.

Whether the Comptroller is entitled by the Act to treat the share investment counters as individual sources of income for deduction purposes

What is the meaning of “source” in s 14(1)?

15 The judge below, noting that there is no technical definition of “source” in the Act, upheld the Board’s interpretation of the word “source” in its natural or ordinary meaning.

16 In unravelling the meaning of the word “source”, we bore in mind a previous statement by this court in Comptroller of Income Tax v GE Pacific Pte Ltd [1994] 2 SLR 690 at 697, [23], that “[i]n any question of statutory interpretation, the first and most important factor is the literal meaning of the words of the provision”. “Source” has been defined by the Oxford Modern English Dictionary (Oxford University Press, 1992), which was referred to by the Board at [13] of its decision, as “a spring [or] fountain from which a stream arises” or “a...