JD v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judge: Belinda Ang Saw Ean J
• Judgment Date: 11 May 2005
• Neutral Citation: [2005] SGHC 92
• Docket Number: District Court Appeal No 15 of 2004
• Date: 11 May 2005
• Year: 2005
• Published date: 14 November 2005
• Plaintiff Counsel: Leon Kwong Wing (Khattar Wong and Partners)
• Citation: [2005] SGHC 92
• Defendant Counsel: Liu Hern Kuan and David Lim (Inland Revenue Authority of Singapore)
• Court: High Court (Singapore)
• Subject Matter: Comptroller applying formula for apportionment of interest expense for purposes of calculating tax payable,Meaning of "source" in s 14(1) Income Tax Act,Conditions to be satisfied for interest expense to be deductible under s 14(1) Income Tax Act,Revenue Law,Interest expense incurred on overdraft and loans obtained to purchase shares,Whether dividend from each shareholding separate and distinct source of income for purposes of deductibility,Deduction,Whether application of formula appropriate,Income taxation,Sections 10(1), 14(1) Income Tax Act (Cap 134, 2004 Rev Ed),Section 14(1) Income Tax Act (Cap 134, 2004 Rev Ed),Whether whole of interest expense deductible against dividend income from shares where some shareholdings not income-producing

11 May 2005

Belinda Ang Saw Ean J:

1 In its grounds of decision ([2004] SGDC 245) dated 30 April 2004, the Income Tax Board of Review (“the Board”) affirmed the decision of the Comptroller of Income Tax (“the Comptroller”) in disallowing the claim of JD to deduct interest expenses in computing the amount of its income on which it was assessable to tax for certain tax years. This appeal by JD, the taxpayer company, which concerned only the disallowance of the interest expenses, involved the construction of s 14(1)(a) read with s 10(1)(d) of the Income Tax Act (Cap 134, 2004 Rev Ed) (“the Act”). The facts were all agreed to by the parties.

2 JD was (and still is) a public-limited investment holding company. At the relevant time, it received as its only income, dividends from shares held in other companies such as:

(a) B, a wholly-owned subsidiary engaged in packing and trading edible oil products;

(b) C, a wholly-owned investment company incorporated in 1981;

(c) D, a wholly-owned subsidiary incorporated in 1982 and trading in consumer goods;

(d) E, a wholly-owned subsidiary, engaged in piling and building construction, civil and structural engineering, renovation and retrofitting business and investments;

(e) F, a public-listed company, engaged mainly in general insurance;

(f) G, engaged in the business of warehousing and investment holding;

(g) H, a wholly-owned property company incorporated in 1987 in Malaysia; and

(h) J, a general trading company.

3 JD’s purchase of the shares in the companies in question were financed by means of (a) overdrafts and loans from banks and related companies at varying rates of interest and (b) JD issuing its own shares or obtaining interest-free loans from related companies. These funds were mixed and placed in its account with a Bank and from which bank account the collective funds were utilised not only towards acquiring JD’s share investments but also for its re-financing of earlier loans as well as advances to related companies.

4 The years of assessment in dispute spanned over a period of 12 years, from 1985 to 1996. Not all of the shareholdings in the companies in question declared dividends in the years of assessment in dispute. For instance, K, B and D did not declare dividends for any of the years of assessment in dispute. Some companies, on the other hand, did not produce dividend income for the following years of assessment:

	Company	Assessment	Period (years)
(a)	L	1985–1991	7
(b)	M	1988–1996	9
(c)	N	1988–1989	2
(d)	P	1990–1994	5
(e)	J	1990–1995	6

5 It is convenient to reproduce, at the outset, the particular sections relevant to the appeal. For ease of reference, I have used the 2004 revised edition of the Act as the text of the sections under review is the same as the previous editions in use during the years of assessment in dispute.

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 —

(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;

(b) gains or profits from any employment;

(c) (Deleted by Act 29/65);

(d) dividends, interest or discounts;

(e) any pension, charge or annuity;

(f) rents, royalties, premiums and any other profits arising from property; and

(g) any gains or profits of an income nature not falling within any of the preceding paragraphs.

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; …

6 In so far as is material to this appeal, the dispute between the parties concerned the deductibility of interest described as expenses incurred in the production of dividend income in computing the amount of JD’s income on which it was assessable to tax for certain tax years. The taxpayer company pressed the point that investing in shares was employing capital to earn dividends. It incurred interest costs on the capital invested. So interest expended on capital employed to acquire the whole basket of investments in shares (which constituted one source of income) for the time being held by the taxpayer company was the cost of earning those dividends. Between 1985 and 1996, the taxpayer company earned dividends from its investments in shares while incurring interest costs on capital invested. Its dividends for each tax year ought to be assessable as a whole. JD’s net income in respect of the dividends was the difference between the gross dividends earned each year as a whole and the interest expense.

7 On the other hand, the Comptroller allowed interest expense as a deduction for only those shareholdings that produced dividend income. This was because the Comptroller regarded each shareholding as a separate investment and dividend income was separately assessable. The Comptroller thereafter aggregated the allowable interest expenses in respect of all the share investment counters to determine the total amount of deductible expenses for the particular year of assessment in determining the chargeable income for that year of assessment.

8 As a consequence of the difference in interpretation of the law (including its application to the share investments as passive income chargeable to tax), the aggregate chargeable income of JD for the years of assessment in dispute computed by the Comptroller was $83,484,337 compared to the sum of $74,694,762 as computed by JD. On the revised figure before the Board, the amount of tax in dispute was $2,497,841.74.

9 The Board, in accepting the Comptroller’s argument, clarified that the word “source” in s 14(1)(a) was not defined in the Act; it did not have a technical meaning and it should be interpreted according to its natural or ordinary meaning in the context of the provision. Given its ordinary meaning, the word “source” in s 14(1) meant “channel or stream of income” and the dividends from each of the different share counters constituted a separate and distinct source of income for the purposes of deductibility. Therefore, only interest expense incurred in producing the income from a particular share counter could be deducted from the dividend income generated by that shareholding. The Board at [38] of its grounds of decision explained:

Turning to the facts of the present case, each of the shareholdings in the subsidiary companies that are owned or held by the Appellant are distinct and identifiable. It was not in dispute that the funds used and the interest expenses in acquiring these separate shareholdings are identifiable. Applying the reasoning stated earlier on “source of income”, dividend income from one block of shares may be treated differently from that from another counter of shares where that block of shares is sufficiently distinct. Dividend income from each of the shareholdings in different companies would be regarded as a different source of income for the purpose of section 14(1)(a) ITA. This is consistent with the principle that section 14(1)(a) requires a direct nexus between expenses incurred and the source of income produced. It would fly against the reason of logic and the legal principle in Section 14(1)(a) that interest incurred for acquisition of shares in one company can also be deducted as expenses against the dividend income from the shareholding in a totally unrelated different company in which different interest expense was incurred using different borrowed money. Hence, only the interest expense on a particular counter of shares is deductible against income from that same counter of shares. Any excess of interest expense over dividend income from the shares is not allowable against other dividend income from other counters of shares.

10 The Board continued at [39] and [40]:

Based on the Statement of Fact, it [was] agreed between the parties that not all interest expenses were incurred on capital employed in acquiring income within the meaning of section 14(1)(a). …

On this basis, applying the reasoning in Andermatt’s case, we agree that using the words of section 14(1)(a) the Comptroller, in this case, cannot “… be satisfied that the interest was payable on capital employed in acquiring [the] income” because the loan (capital) to acquire the separate blocks of shares in these different companies did not produce dividend income in the relevant years.

11 The Board further ruled at [48] that the Total Assets Formula (for allowing an apportionment of interest into the non-income producing and income-producing elements in determining the amount of expenses deductible) adopted by the Comptroller was legally tenable and reasonable and the formula had been properly applied to the facts of the case.

12 Counsel for JD, Mr Leon Kwong Wing, submitted that the Board was wrong in concluding that the Act did not define the sources of income chargeable with tax. According to Mr Leon, sources of income chargeable with tax were clearly defined in s 10(1) of the Act. He cited Andermatt Investments Pte Ltd v Comptroller of Income Tax [1995] 3 SLR 451 (“Andermatt Investments”) where the Court of Appeal stated at 457, [16] that “[s]ection 10(1) sets out the various sources of income which are subject to tax”. He submitted that s 10(1) stipulated that the...