TH Ltd v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judge: Chua F A J
• Judgment Date: 14 January 1981
• Neutral Citation: [1981] SGHC 2
• Docket Number: District Court Appeal No 39 of 1979
• Date: 14 January 1981
• Published date: 19 September 2003
• Year: 1981
• Plaintiff Counsel: Andrew Ang (Lee & Lee)
• Citation: [1981] SGHC 2
• Defendant Counsel: Loo Lian Ee (Inland Revenue)
• Court: High Court (Singapore)
• Subject Matter: Revenue Law,s 83(3) Income Tax Act (Cap 141),Change in 'treatment of an item of expense',Property tax,Accounting system,Board's decision affirmed by court,Change disallowed by Board,Onus on company to show good reason for change

This appeal arises from a Notice of Assessment dated 30 June 1976, for Year of Assessment 1975, against which assessment the appellant company (the company) appealed to the Income Tax Board of Review (the Board) which dismissed the appeal with costs. The company now appeals to this court.

The company was incorporated on 15 April 1970, as a public company, and carries on business as a housing developer. Since its incorporation the company purchased various parcels of land, some of which were developed while the others were held in its `land bank`. As a consequence of a slump in the property market prevailing in Singapore around 1974, several development projects were halted in mid-stream and were delayed for about five years.

In its accounts pertaining to its various development projects the company has adopted the `completed contract` cost accounting system, whereby profit is recognised only when the contract or project is completed. Under this system, expenditure incurred in a development together with receipts from booking fees and progress payments are accumulated during the course of the project and profit is not reported until the project is substantially completed.

Each project is treated separately and individual cost records are kept for each project. Development expenses are then capitalised in the balance sheet and are accumulated and carried forward from year to year until the project is completed. Upon completion all the expenses attributable to a particular project are deducted from proceeds of sale, with net profits assessed to tax.

For the accounting years 1970 to 1973 property tax incurred annually in respect of properties held by the company was `capitalised` in the balance sheet as part of the overall development expenditure and did not appear in the profit and loss accounts.

However, for the financial year 1974, payments of property tax were for the first time treated as an item of expenditure and charged into the debit side of the profit and loss account. Property tax amounting to $253,980 was claimed as an item of allowable expenditure under s 14 of the Income Tax Act (Cap 141) (the Act) against income of the company.

This change of treatment of property tax payment was not allowed by the Comptroller of Income Tax (the Comptroller) on the grounds that:

(i) the property tax paid was not in the production of income assessable to tax for Year of Assessment, 1975;

(ii) the property tax had been paid in respect of properties that were being developed and should therefore form part of the costs of development;

(iii) as the development projects were dealt with on a project basis, all direct expenses incurred in connection with each particular project had to be capitalised and allowed against the sale proceeds received on the completion of the project.

The main point of issue is ground (ii) of the Comptroller.

The dispute in this appeal is concerned not with the question whether the property tax is an allowable deduction per se but rather with the question of when the property tax should be allowed as a deduction.

The company contends that the property tax of $253,980 paid in 1974 in respect of its properties is deductible in the Year of Assessment, 1975. The Comptroller, on the other hand, does not dispute that property tax is a revenue expense that is deductible under the Act. He is disputing only the time when the property tax should be deducted. It is the Comptroller`s contention that on the basis of the `completed contract` method of accounting adopted by the taxpayer, the property tax in respect of each development project is deductible only upon the completion of that development project.

The company is charged to tax under s 10(1)(a) of the Act, which provides, inter alia, that `income tax shall be payable for each year of assessment upon the income of any person in respect of - gains or profits from any trade, business, profession or vocation...`. The resolution of the dispute in the present appeal necessitates an examination of the proper method of computing the company`s profits or gains for the Year of Assessment, 1975. The Act is silent as to the proper methods of computation.

Let us look at the reasons why the company changed its previous treatment of property tax.

Reasons for change

Various reasons were given for the change. The main one was that because of the slump in the property market in 1974 doubts were cast about market conditions and the future viability of various projects which were halted. Development costs would thus be increased by the addition of property tax although no development work was being carried out. The value of the stock-in-trade would thus be overstated.

Another reason was that the company was advised by its tax advisers that it did not have to `capitalise` property tax because such tax is in no way related to the acquisition of a capital asset, nor did it enhance the value of the properties. Furthermore, since property tax was a revenue expense incurred in the maintenance of the company`s stock-in-trade, it should not be capitalised.

Mr Anthony John Coomber, a practising chartered accountant with a well-established firm of accountants in Singapore, said in evidence that he had seen the accounts of the company for 1974; that from his perusal, although it did not show any accounting policy used, it appeared to have used completed contracts accounting basis; that it was the most conservative method of computing contracts covering more than one year; and that revenue was recognised when contract was completed or substantially completed.

He further said that from the perusal of the profit & loss account it would appear the property tax had been expensed under profit and loss account. He stressed that such a treatment of property tax was not inconsistent with commercial accounting practice and that it was not inconsistent with completed contract accounting basis. He said that property tax should never be capitalised as it did nothing to enhance the value of the property concerned and was paid solely in the period it became payable and certainly produced no benefit lasting beyond such period.

He further said that comparing the accounts for 1974 with previous years, the change in the treatment was not wrong, not by itself but there should have been a correction shown of previous years wrong. This had not been done.

He said that the `Statement of Standard Accounting Practice No 9` (SSAP 9) (exh 1) and `Exposure Draft No 12 of the International Accounting Standard` (exh 2) supported his views that the properties of the company should be treated as trading stocks.

SSAP 9 was issued by the Institute of Chartered Accountants in...