JD v Comptroller of Income Tax
| Jurisdiction | Singapore |
| Judge | Wong Keen Onn |
| Judgment Date | 30 April 2004 |
| Neutral Citation | [2004] SGDC 245 |
| Citation | [2004] SGDC 245 |
| Court | District Court (Singapore) |
| Plaintiff Counsel | Leon Kwong Wing and Chee Fang Theng (Khattar Wong and Partners) |
| Defendant Counsel | Liu Hern Kuan and David Lim |
| Published date | 29 November 2005 |
District Judge Wong Keen Onn (Chairman)
Mr Tan Kin Lian (Member)
Mr Lim Hock San (Member)
Background
1 This is an appeal by JD (the Appellants or “JD”) against the refusal of the Comptroller of Income Tax (Respondent) to revise a Notice of Assessment dated 12 November 1998 which assessed the Appellants to tax in the Years of Assessments 1985, 1987, 1988, 1989, 1990 to 1996. The Appellant had sought a deduction of expenses amounting to $20,978,149 being interest expenses but only $12,109,385 was allowed. An additional assessment of tax amounting to $2,883,512.77 payable by the Appellant.
2 There was an agreed Statement of Facts (marked ASOF) and Agreed Bundle of Documents (marked ABD). During the hearing, the Appellant tendered in a supplemental bundle of documents (ASBD) while the Respondent tendered to the Board their set of bundle of documents (RBD). All these documents were admitted in evidence without objections from the opposing party. Pursuant to certain queries by the Board, both parties tendered in further submissions on 27 July 2002 to the Board. As there was no dispute between the parties as to the facts relevant for the disposition of this case, the Board will base its decision on the Agreed Statement of Facts and the three sets of documents ABD, ASBD and RBD.
Agreed Statement of Facts
3 The agreed facts are as follows:
(1) The Appellant is a company incorporated in Singapore on 29 December 1952 and has its registered address at [xxx]. It is presently a public company which is listed on the Stock Exchange of Singapore. The Appellant is run by a board of directors consisting of 8 directors, and its financial statements for 1996 discloses a net asset value of cost to $440.5 million.
(2) The Appellant initially commenced business operations in manufacturing and refining of edible oil, soap and related products. In 1983, the Appellant reorganized its business operations by transferring its manufacturing and refining operations to its subsidiary, B, and focused on the activity of making long term share investments.
The Appellant’s Principal Activities:
(3) The Appellant principal activity for the Years of Assessment 1985 to 1996 (hereinafter referred to as the “Year of Assessment in dispute”) consisted of investing in shares, with substantial long-term share investments in various subsidiaries and associated companies.
(4) During the Year of Assessment in dispute, the Appellant held substantial shareholdings in the following major operating companies (apart from its long-term share investments in other companies):-
4.1 B, a wholly-owned subsidiary of the Appellant, engaged in the packing and trading of edible oil products. It was acquired by the Petitioner in 1978;
4.2 C, a wholly-owned subsidiary incorporated in 1981, engaged in investment holding;
4.3 D, a wholly-owned subsidiary incorporated in 1982, engaged in the business of trading in consumer goods;
4.4 E, a wholly-owned subsidiary acquired in 1982, engaged in piling and building construction, civil and structural engineering, renovation and retrofitting business, as well as investment holding activity;
4.5 F, a 99.6% owned listed company, engaged mainly in general insurance. It was acquired by the Appellant in 1985;
4.6 G, acquired in 1984 and engaged in the business of warehousing and investment holding;
4.7 H, a wholly-owned subsidiary incorporated in Malaysia in 1987, engaged in property investment and development business; and
4.8 I, acquired in 1987, formerly involved in construction activities and trading but later engaged in general trading.
The Appellant ’s methods of financing its principal activities:
5 The Appellant raised its working capital mainly through two methods.
First method – interest-bearing financing:
The first method involves obtaining loans and overdrafts from banks and related companies at varying interest rates. This method resulted in interest expense being incurred.
Second method – non-interest bearing financing:
The second method involves the Appellant issuing its own shares or obtaining interest-free loans from related companies. This method did not result in interest expense being incurred.
6 The interest-bearing and non-interest bearing funds formed a mixed pool of funds as they were banked into the Appellant’s main bank account with Hongkong & Shanghai Banking Corporation Ltd (“HSBC”). The Appellant’s aggregate working capital acquired through both the aforesaid methods was then withdrawn from the bank account and allocated towards its various objects as and when required, such as the acquisition of the Appellant’s share investments, re-financing of earlier loans, as well as making of advances to related companies.
The Appellant’s income from share investments:
7 As the Appellant was engaged in the principal activity of share investment holding, its income was principally derived from dividends declared by the companies of which it is a shareholder.
Issues not in dispute:
8 The figures for the share investments financed by interest-bearing funds as well as non-interest bearing funds were derived from the Appellant’s tax computations. These figures were used by the Comptroller in computing the interest expenses to be allowed. The Comptroller and the Appellant are in agreement as to how much of the share investments were financed by interest-bearing funds or non-interest bearing funds.
9 Both the Appellant and the Comptroller agree to the application of the Total Assets Formula (hereinafter “the Formula”) in determining the amount of allowable interest expense. However, they differ as to the method of application of the Formula, due to the reasons set out in paragraphs 10 to 12. The parties have since agreed to have the appeal argued on the basis of the Formula, as applied by both parties. The Formula which both sides have agreed is applicable is as shown below:-
A / C X I
Where:
A (Appellant’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 income-producing share investments financed by interest-bearing funds for each Year of Assessment in dispute.
C = total cost of assets as at the balance sheet date which were financed by interest-bearing funds for each of Year of Assessment in dispute.
I = the total interest expenses incurred by the Petitioner for each Year of Assessment in dispute.
10 The dispute centers principally on the Comptroller’s treatment of each share investments counter as a separate source of income, while the Appellant takes the position that all its share investments constitute a single source of income. Therefore, the dispute relates to the basis of computing the correct amount of interest expenses which should be allowed as deduction against dividend income earned by the Appellant for each of the Years of Assessment in dispute, according to the terms of the Income Tax Act (“the Act”).
11 As a consequence of the difference in treatment as stated in paragraph 10 , the Appellant’s numerator (A) in the Formula was based on all the share investment counters forming one source of income, whereas the Comptroller’s numerator (A) was based on each share investment counter constituting a separate source of income.
12 Apart from this, the Appellant ’s figure for the numerator (A) exceeds the figure used by the Comptroller by $5,500,000 due to the Appellant’s position that the compensation payment of $5,500,000 which it had made to the vendor of G shares for the premature termination of the management agreement constituted part of the costs of acquiring the said shares.
Comptroller’s Position:
12 For the Years of Assessment in dispute, the Comptroller assessed the Appellant’s dividend income from its various counters of shares investments as passive income chargeable to tax under the provisions of section 10(1) (d) of the Act.
14 The Comptroller treated the Appellant’s investments in each share investment counter as a separate source of income. The Comptroller’s method of computation of deductible interest expenses was as follow:-
14.1 Firstly, for any Year of Assessment, the Comptroller applied the Formula in paragraph 9 separately to each share investment counter, and computed the interest expense attributable to that share investment counter financed by interest-bearing funds. Where no dividend income was produced from that share investment counter for that Year of Assessment, the computed interest expense for that share investment counter was not allowed as a deduction, subject to paragraph 15 below; and
14.2 Secondly, the Comptroller totaled up the allowable interest expenses in respect of all the share investment counters to determine the total amount of deductible interest expenses for the particular Year of Assessment in determining the chargeable income for that Year of Assessment
15 However, once a share investment counter had generated dividend income in a particular year, the interest expense attributed to that particular share investment counter would be allowed for that year as well as all subsequent years, even if such share investment counter did not generate any dividend in the subsequent years.
16 The Comptroller’s series of adjustments for each Year of Assessment in dispute is shown in the Appendix to this Agreed Statement of Facts, titled “Comptroller’s basis of interest allocation”.
The Appellant’s Position:
17 The Appellant takes the position that all the share investment counters constitute one source of income, and the interest expenses incurred in Acquiring this source of income should be allowed against all dividend income should be allowed against all dividend income generated by all the share investment counters financed by interest-bearing funds. The Appellant’s basis of interest allocation for each Year of Assessment in dispute is summarized in the Appendix to this Agreed Statement of Facts, titled “Appellant’s basis of interest allocation”.
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