T Ltd v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judge: Andrew Ang J
• Judgment Date: 30 June 2005
• Neutral Citation: [2005] SGHC 115
• Date: 30 June 2005
• Subject Matter: Income taxation,Whether interest incurred by appellant of capital or revenue nature,Whether interest deductible,Revenue Law,Whether expenses deductible under ss 14(1)(a) and 37(1)(a) Income Tax Act,Whether company incurring expenses before commencement of business,Sections 14(1)(a), 37(1)(a) Income Tax Act (Cap 134, 1996 Rev Ed),Deduction,Company seeking to claim expenses as deductions,Section 15(1)(c) Income Tax Act (Cap 134, 1996 Rev Ed)
• Docket Number: District Court Appeal No 14 of 2004
• Published date: 14 October 2005
• Defendant Counsel: Liu Hern Kuan and Usha Chandradas (Inland Revenue Authority of Singapore)
• Court: High Court (Singapore)
• Plaintiff Counsel: Nand Singh Gandhi (Allen and Gledhill)

1 This is an appeal by the taxpayer company against the decision of the Income Tax Board of Review (“the Board”) dated 26 April 2004 in Income Tax Board of Review Appeal No 20 of 2000.

2 The appeal before the Board was based on an Amended Agreed Statement of Facts as is the appeal before me. They are as follows, after due amendment, so as not to reveal the identity of the appellant:

1. The appellant, T Ltd (“the Company”), is a company incorporated in Singapore.

2. The Company was incorporated by a firm of lawyers on 24 July 1989 as a private limited company. It had a $2 paid-up capital and did not carry on any business. In 1992 it was acquired by the D Land Group upon which its name was changed to T Ltd and its first objects:

(a) To purchase, take on lease or otherwise acquire from the Housing and Development Board the land described as Land Parcel P4, Tampines in the Republic of Singapore and any estate or interest in and any rights connected with such land.

(b) To carry on the business of constructing or otherwise developing a building on Land Parcel P4, Tampines, for the purpose of owning, managing and operating a property letting business.”

On 24 June 1998, the Company was converted to a public company.

3. The Company was awarded the land from the HDB on 6 June 1992. It signed a building agreement with the HDB on 1 December 1992 under which it undertook to develop the land. The proposed development project was described as a “comprehensive retail complex with 3 basements (2 for carparks and 1 for shops and supermarket), a 4-storey shopping podium … and two towers …”.

4. The purchase of the land was funded by share capital and interest-bearing shareholders’ loans. Subsequently, and during the construction phase, part of the shareholders’ loans was converted to share capital and part (but not all) replaced by external borrowing which bore interest.

5. The Company submitted plans on 16 December 1992 to develop the complex and obtained provisional planning approval on 6 February 1993. The chronology of significant events from then on was:

Date of award of main building contract:

19 October 1993

Date of commencement of superstructure works:

2 November 1993

Date of Temporary Occupation Permit (“TOP”):

15 November 1995

Date when first tenancy commenced:

15 November 1995

6. In the accounts for 1990 and 1991, the principal activity of the Company was described in the Directors’ Report as that of “investment in and development of properties. Such activities, however, have not commenced since the date of incorporation of the company.” In the accounts for 1992 (the year in which the land was acquired) to 1995, the principal activity was described as “property investment and development”.

7. The Company’s intention in developing the building was for long-term investment by letting out to various tenants.

8. The Company incurred interest and other expenses such as administrative, marketing and advertising expenses from 28 October 1993 to 15 November 1995, the date of the granting of the TOP. The amount of these pre-TOP expenses brought forward to the year of assessment 1997 (the subject year of this appeal) was $5,213,184, comprised as follows:

Interest $4,825,015

General and administrative expenses $ 86,401

Advertising and promotion expenses,

agency fees and marketing expenses $ 301,768

9. The Company claimed these expenses (“the said expenses”) as deductions under section 14 of the Income Tax Act and sought to carry forward the excess of the said expenses over income as losses under section 37 of the Act.

10. The Comptroller of Income Tax refused to allow the deductions of the said expenses (and hence the carry-forward of the losses) incurred prior to the date of the granting of the TOP.

11. The Company applied to the Comptroller under section 76(2) of the Act, for the said assessment to be reviewed and revised.

12. On 20 October 2000 the Comptroller issued a Notice of Refusal to Amend in respect of the said assessment and the Company on 20 October 2000 filed with the Comptroller and the Clerk to the Board of Review a Notice of Appeal under section 79(1) of the Act.

3 The questions before the Board were whether the said expenses incurred by the appellant, prior to the date the appellant obtained the TOP:

(a) qualified for deduction under s 14(1) of the Act;

(b) were not disallowed by s 15(1) of the Act; and

(c) qualified to be carried forward as losses under s 37 of the Act to the extent to which they exceeded income in any year of assessment.

4 The parties characterised the underlying issues as the “Pre-Commencement Issue” and the “Capital Expenditure Issue”.

The pre-commencement issue

5 The Inland Revenue Authority of Singapore’s (“Revenue’s”) contentions on the Pre-Commencement Issue may be summarised as follows:

(a) Losses of an earlier period may be brought forward and set off against the taxpayer’s statutory income of a later year if the requirements of s 37(2)(a) are satisfied.

(b) Section 37(2)(a) losses arise from the incurring of expenditure deductible under s 14; if such expenditure is not deductible under s 14, no s 37(2)(a) losses will arise.

(c) Expenditure is not deductible under s 14 if there is no “business” in existence at the time when the expenditure is incurred.

(d) The appellant’s business did not commence until the TOP was granted in respect of T Ltd.

(e) Therefore, expenses incurred during the development period were “pre-commencement” expenses; they were not deductible under s 14 and therefore could not be carried forward as s 37(2(a) losses.

6 Before the Board and in the present appeal, whilst the appellant did not take issue with Revenue’s propositions (a), (b) and (c), it contended that proposition (d) was wrong. It argued that its business commenced when, as a property investment company, it commenced to lay out money on the creation or acquisition of its investment property. If proposition (d) was wrong, then proposition (e) likewise would fail.

The capital expenditure issue

7 Revenue’s contention with regard to this issue began with the same propositions (a) and (b) as in the Pre-Commencement Issue, but then continued as follows:

(c) Expenditure is not deductible under s 14 if either:

(i) it is itself of a capital nature; or

(ii) it is “in respect of any sum employed as capital” within s 15(1)©.

(d) Interest paid by the appellant was either of a capital nature or within the scope of the words “in respect of sums employed as capital …” in s 15(1)© and hence disallowed.

(e) Therefore, the said expenditure was not deductible under s 14 and could not create s 37(2)(a) losses to be carried forward.

8 The appellant challenged the Revenue’s contentions in proposition (d) and argued, firstly, that interest is inherently of a revenue nature and, secondly, that interest incurred by the appellant is not caught by the words “in respect of any sums employed as capital”.

9 I shall now deal with the first of the two issues.

Commencement of business

10 Was the appellant carrying on business at the time it incurred the said expenses? If it was not, the expenses are not allowable, being pre-commencement expenses.

11 For the appellant, it was argued that, in order to determine when a business commences, it is necessary to identify what is the true essence of the business. It was contended that with an investment company, the essence of the business consists in laying out capital expenditure with a view to deriving rental income; the business commences when the company commences to lay out its capital expenditure.

12 Counsel for the appellant identified two separate aspects of the business of a typical property investment company. One is the activity of deriving an investment income, ie, rents. The other is the activity of owning the investment and doing everything associated therewith. Counsel stressed that in the case of a property investment company, the acquisition of an area of land and the creation of the investment by erecting a building on the land are just as much part of the company’s business as the subsequent earning of rents from the building when it has been completed and let.

13 Counsel for the appellant pointed to the objects clause in the appellant’s Memorandum of Association and submitted that its business, indeed the very reason for its existence, was to acquire the Housing & Development Board site and to construct a building on it for the purpose of owning, managing and operating a property-letting business.

14 Although counsel conceded that a company cannot conclusively answer the question as to when its business commences merely by what it puts in its objects clause, he submitted nevertheless that there is a very strong presumption that if a company’s objects clause indicates that the company has been formed to carry out a particular activity, and the company then proceeds to do precisely what it has been formed to do, its activities are the carrying on of a business, and the business commences as soon as the company starts to perform the functions set out in its objects clause.

15 The same arguments were made before the Board. The Board considered the activities of the appellant in acquiring the building (ie, in obtaining a lease of the land and developing a building thereon) as a one-off or isolated activity. It observed that the appellant owns only that single property and that the regular activity of the appellant was in letting out space in that building to suitable tenants. The Board drew support for its view from one of the principal objects of the appellant which was to “carry on the business of constructing or otherwise developing a building on Land Parcel P4, Tampines, for the purpose of owning, managing and operating a property letting business” [emphasis in original].

16 The Board found further support for its view in the Notes to the Accounts of the Company for years 1992 to 1996 wherein it was stated that the “properties [were] held for the primary...