Mount Elizabeth (Pte) Ltd v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judge: Chan Sek Keong JC
• Judgment Date: 05 September 1986
• Neutral Citation: [1986] SGHC 35
• Docket Number: Civil Appeal No 19 of 1985
• Date: 05 September 1986
• Year: 1986
• Published date: 19 September 2003
• Plaintiff Counsel: Sat Pal Khattar (Khattar Wong & Partners)
• Citation: [1986] SGHC 35
• Defendant Counsel: Loo Lian Ee (Assistant Commissioner of Inland Revenue)
• Court: High Court (Singapore)
• Subject Matter: Appeals,Whether sufficient evidence present to justify imposition of income tax,Income taxation,Whether capital receipt or trading profits,Additional assessment on surplus resulting from sale of flats,Revenue Law

This is an appeal against the decision of the Income Tax Board of Review (the Board) dismissing the appeal of the appellant against the additional assessment made by the Comptroller of Income Tax (the Comptroller) for the year of assessment 1981 on the surplus resulting from the disposal of six flats which were together with 53 other flats developed by the appellants during 1971-1973. The surplus was $2,093,387 and the additional tax assessed was $857,770.

Before the Board, the following facts were agreed between the parties:

(1) The appellant was incorporated on 8 July 1970.

(2) The appellant on 28 September 1970, resolved to ratify a purchase of a piece of land known as 26/27 Mount Elizabeth (the property) for $852,006

(3) By 31 December 1970, the purchase had been completed with funds substantially from its share capital.

(4) The appellant immediately proceeded to develop a block of high-rise apartments on the property known as `Highpoint`.

(5) The sale of the flats commenced in 1971.

(6) The paid-up capital of the appellant was increased to $1.5m in 1971.

(7) The development of Highpoint was financed largely by shareholders` funds, loans from a related company and progress payments from purchasers.

(8) Of the 50 apartments constructed, 51 were sold between 1971 and 1973 and eight were retained by the appellant.

(9) Six of the retained flats were sold in 1980.

(10) In 1973 the appellant made two further purchases of land:

(a) land at Draycott Drive Lot 12-103 for $1,771,974.88; and

(b) land at Farrer/Holland Road for $5,111,106.00.

(11) Development expenditure was incurred in respect of these two sites and planning approval was obtained for the construction of 23 units of luxurious apartments on the Draycott site.

(12) In 1980 the appellant sold the Farrer/Holland Road property. The profit from the sale was subject to tax.

In addition to the agreed facts, the following facts which are relevant to this appeal are disclosed in the agreed bundle of documents submitted to the Board. These facts are as follows:

(1) The relevant objects of the appellant as set out in its memorandum of association are:

3(1) To acquire by purchase, lease, exchange, hire or otherwise, lands and property of any tenure, or any interest in the same, in Singapore.

(2) To erect and construct houses, buildings or works of every description on any land of the company, or upon any other lands or property,... and generally to deal with and improve the property of the company.

(13) To develop and turn to account any land acquired or in which the company is interested, and in particular by laying out and preparing the same for building purposes, constructing, decorating, maintaining, furnishing, fitting up improving altering pulling down and re-erecting or reconstructing buildings and by planting, paving, draining, farming, cultivating, letting on building lease or building agreement and by advancing money to and entering into contracts and arrangements of an kinds with buildings, tenants and others.

(27) (a) To carry on all or any of the businesses of proprietors of flats maisonettes, dwelling-houses, shops, offices and clubs, and for these purposes to purchase, take on lease, or otherwise acquire and hold any lands or buildings of any tenure or description wherever situate, or rights or interests thereon or connected therewith...

(2) The financial year of the appellant ended on 31 December of each year. The directors` report (the directors` report) to the audited accounts of the appellant for the financial year 1970 stated, inter alia, that `The company is engaged in the construction of a block of luxury flats which is expected to be completed and ready for occupation in 1973.` In the accompanying balance sheet, the property was classified as and under the item `Development Project`.

(3) Each of the directors` reports for the financial years 1971 to 1973 stated, inter alia, that the appellant`s `principal activity is the development and construction of luxury apartments for sale. There has been no change in the nature of this activity during the year`. In the relative balance sheets, the freehold land was classified as and under the item `Development Project`.

(4) In each of the directors` report for the financial years 1974 and 1975, the description of the company`s activity was the same as for 1971 to 1973 (except for the omission of the word principal), but in the related balance sheets a new item appeared under the classification `Fixed Assets`. It is common ground that the fixed assets referred to were the eight Highpoint flats which were retained by the appellant.

(5) In each of the directors` reports for the financial years 1976 to 1981, the description of the activities of the company was `property development and the holding of property for rental`. It further stated that `during the year, the company did not undertake any property development but rented out its apartments held for investment. There have been no changes in the nature of these activities during the year`. The eight flats continued to be classified in each of the relative balance sheets as `Fixed Assets`.

(6) By a letter dated 24 May 1974, the appellant`s solicitors informed the Controller of Housing that all the flats in Highpoint had been sold except for eight flats which the appellant was not selling `as they would like to let out these flats`. By a letter dated 18 February 1975 the appellant informed the Controller of Housing that it had deliberately withheld the sale of some apartments which `we intend to retain for investment purposes`. By a letter dated 23 August 1975, the appellant again informed the Controller of Housing that eight flats were being retained by it, but this letter did not offer the additional information that the eight flats were retained for the purpose of investment.

(7) On 27 November 1981, the Comptroller made an additional assessment for the year of assessment 1981 against the appellant in respect of the profits derived from the sale of six of the eight Highpoint flats. On 4 November 1981 the appellant, through its solicitors, wrote to the Comptroller and objected to the additional assessment the ground that the amount of $2,093,387 being the surplus from the sale of six flats, was a capital receipt and liable to tax. The ground of objection as set out in para 3 of the letter reads as follows:

It is not denied that our clients were in fact a developer. However that does not make every property that it owns a current asset. The accounts bear this out. If you would look at the balance sheet and accounts for the period ending 31 December 1974 and onwards you would quite clearly notice the two holdings are separately reflected by our clients in the accounts. Since 1974 these properties were always reflected as fixed assets.

In support of this objection, copies of the appellant`s correspondence with and returns made to the Controller of Housing were enclosed in the said letter.

(8) By a letter dated 15 December 1981, the Comptroller requested the appellant to state the reasons for the sale of the six Highpoint flats when it had claimed that the six flats were retained for investment. By a letter dated 22 December 1981, the solicitors for the appellant replied that every investment had to be reviewed occasionally as to whether or not the continued holding of it was still relevant in terms of the investment objective and that in 1980, the appellant felt that the sudden upsurge in the prices of its investment did not justify its continued retention and hence decided to sell the six flats.

(9) By a letter dated 3 April 1982, the appellant`s solicitors furnished to the Comptroller particulars of the rental history of the six flats which showed that three flats had been rented out continuously from 1974 to 1980 and three flats had been rented out continuously from 1975 to 1980.

(10) The income derived from the letting of the eight flats for each of the relevant years had been assessed to tax under s 10(1)(a) of the Income Tax Act on the basis that it was part of trading profits and not investment income and no objection was raised by the appellant to each of the said assessments.

At the hearing of the appeal to the Board, the appellant called Mr Lim Chor Pee (AW1), an advocate and solicitor, who was also a director of the appellant from 1970 to 1978, to testify. His evidence was as follows:

(a) In 1970, he was instructed by an Indonesian businessman, Jauw Hin Liang @ Jan Darmadi (Darmadi) to act for him in the purchase of the property on which he wanted to build a block of apartments for sale and investment. AW1 advised Darmadi to form a limited liability company to carry out his objective and so the appellant was incorporated on 8 July 1970, for that purpose. Darmadi was in effect the owner of the appellant. The completion of the purchase in December 1970 was substantially financed from shareholders` funds. Construction commenced in 1971 and the sales of the flats commenced in 1971 after the appellant obtained a developer`s licence. AW1 also said that `Shortly after Darmadi bought the property for Mt Elizabeth he told me he did not want to sell all the flats. He specifically instructed me to keep the two penthouses for himself and to retain eight apartments.`

The Highpoint development was largely self-financed. Darmadi was not worried about additional funding even though all the flats were not sold in 1971. Part of the funding came from progress payments. As at 31 February 1972, the appellant had repaid its small bank overdraft and any shortfall in funding the development, if any, was financed by borrowings from a related company. There was at that stage no external borrowing. The Farrer Road and Draycott Drive projects which were purchased in 1973 were financed by loans from a related company.

The appellant did not have a proper sales office until the show...