T Ltd v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judge: Chao Hick Tin JA
• Judgment Date: 30 March 2006
• Neutral Citation: [2006] SGCA 13
• Docket Number: Civil Appeal No 78 of 2005
• Date: 30 March 2006
• Published date: 31 March 2006
• Year: 2006
• Plaintiff Counsel: K Shanmugam, SC and Nand Singh Gandhi (Allen & Gledhill)
• Citation: [2006] SGCA 13
• Defendant Counsel: Liu Hern Kuan, David Lim and Usha Chandradas (Inland Revenue Authority of Singapore)
• Court: Court of Appeal (Singapore)
• Subject Matter: Whether interest incurred on capital employed in acquiring income,Revenue Law,Sections 10(1)(a), 14(1), 37(2)(a) Income Tax Act (Cap 134, 1999 Rev Ed),Whether expenses incurred prior to commencing of business,Income taxation,Deduction,Taxpayer company seeking to claim as deduction interest on loans for purchase of land on which shopping centre to be built,Taxpayer company seeking to claim as deductions expenses incurred prior to grant of temporary occupation permit and have such expenses carried over as losses,Sections 14(1)(a), 15(1)(c), 37(2)(a) Income Tax Act (Cap 134, 1999 Rev Ed),Whether expenses incurred in production of income

30 March 2006

Tay Yong Kwang J (delivering the judgment of the court):

1 Prior to the grant of the temporary occupation permit (“TOP”) for a shopping mall, the taxpayer company (“the taxpayer”) incurred certain expenses and sought to have those expenses deducted and carried forward as losses. The Comptroller of Income Tax (“the Comptroller”) refused to allow the deduction and to treat the expenses as losses. The taxpayer appealed to the Income Tax Board of Review (“the ITBR”) which upheld the decision of the Comptroller. The taxpayer then appealed to the High Court in District Court Appeal No 14 of 2004 where Andrew Ang J (“the judge”) affirmed the ITBR’s decision but disagreed with it on one of two issues. The taxpayer then appealed to the Court of Appeal. We dismissed the appeal with costs and now give the reasons for our decision.

The Agreed Statement of Facts

2 The appeal before the ITBR, as was the appeal before the judge and before us, was based on an Agreed Statement of Facts dated 25 September 2002 which stated as follows (the taxpayer is referred to therein as “T Ltd” and particulars which would identify it have been omitted in order to preserve its anonymity):

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 object to:

(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.

The relevant statutory provisions

3 The arguments centred on whether the expenses set out in the Agreed Statement of Facts were deductible under the general formula in s 14(1) of the Income Tax Act (Cap 134, 1999 Rev Ed) (“the Act”) and, where the interest was concerned, whether it was deductible specifically under s 14(1)(a). As the inclusionary provisions in s 14 are subject to the exclusionary provisions in s 15 of the Act, the arguments then flowed to whether the interest was disallowed as a deduction under s 15(1)(c) in any event. If the deductions were allowed, they would reduce the taxpayer’s assessable income pursuant to s 37. The said provisions, including s 10 on “Charge of income tax”, read:

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; …

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;

…

15 (1) Notwithstanding the provisions of this Act, for the purpose of ascertaining the income of any person, no deduction shall be allowed in respect of —

…

(c) any capital withdrawn or any sum employed or intended to be employed as capital except as provided by section 14(1)(h);

…

37 (1) The assessable income of any person from all sources chargeable with tax under this Act for any year of assessment shall be the remainder of his statutory income for that year after the deductions allowed in this Part have been made.

(2) There shall be deducted —

(a) the amount of a loss incurred by that person during any year preceding the year of assessment in any trade, business, profession or vocation which, if it had been a profit would have been assessable under this Act, and which has not been allowed against his statutory income of a prior year[.]

The decisions of the ITBR and the High Court

4 The parties proceeded on the basis of two issues compendiously identified as the “Pre-Commencement Issue” and the “Capital Expenditure Issue”. It was agreed that expenses were not deductible under s 14 of the Act if there was no business in existence at the time the said expenses were incurred. Under the first issue, the ITBR was of the view that the said expenses of the taxpayer were incurred before the commencement of the business of letting out the shopping mall in question as that business commenced only when the TOP was granted. In respect of the second issue, the ITBR held that the interest paid, being capital in nature, was specifically disallowed under s 15(1)(c) of the Act.

5 The judge agreed with the ITBR on the pre-commencement issue but disagreed with its decision on the capital expenditure issue. He was of the opinion that the interest incurred was of a revenue nature and would therefore have been deductible if not for his decision on the pre-commencement issue. However, since the taxpayer had to succeed on both issues, the judge dismissed the appeal accordingly.

The appeal

6 Before us, the taxpayer contended that the judge had erred in his determination of the pre-commencement issue. The taxpayer also submitted that even if its appeal failed before us, each party should bear its own costs here and below as this was a test case and the Comptroller had succeeded on only one of the two issues in contention.

7 The Comptroller did not file a cross-appeal but urged us to dismiss the taxpayer’s appeal on the pre-commencement issue and to overturn the judge’s ruling on the capital expenditure issue. He sought the second order on the basis of O 57 r 9A(5) of the Rules of Court (Cap 322, R 5, 2004 Rev Ed) which permits a respondent in an appeal who, not having appealed from the decision of the High Court, but desiring to contend on appeal that the said decision should be affirmed on grounds other than those relied upon by that court, to do so by stating the grounds of that contention in its Case. The Comptroller also submitted that there was no good reason why the costs order sought by the taxpayer should be made in this case.

The decision of the Court of Appeal

Issue 1 – The pre-commencement issue

8 The judge framed this issue in the following manner (see [2005] 4 SLR 285 at [10]):

Was the appellant carrying on business at the time it incurred the said...