075-NLR-NLR-V-37-COMMISSIONER-OF-INCOME-TAX-v.-P.-K.-N..pdf

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MAARTENSZ J.—Commissioner of Income Tax v. P. K. N.
permits the deduction of outgoings and expenses incurred. An“ outgoing ” means something that has gone out, an expense whichsomeone has been at [43 L. J., p. 144 at p. 146], “Expenses incurred”means money actually paid out (118 E. R. p. 737.) Mayor of West Ham v.Grant Commissioner of Income Tax v. Antell'.
Although the accounts of the rice business and the shipping activitiesare separately kept, the position is not altered. The taxing authorityis not bound by the way in which an assessee keeps his accounts.
H. V. Perera (with him N. Nadarajah and Aiyar), for respondent.—Theshipping business and the rice business are separate activities and theshipping business, not being a business carried on in Ceylon, is not taxableas the assessee is a non-resident person. If the assessee is not allowed todeduct the full freight on the rice from the profits of the rice businessit will amount to an indirect taxation of the profits of the shipping businesswhich cannot be taxed in Ceylon.
Commissioner of Income Tax v. Antell (supra) cited by the ActingSolicitor-General is not applicable to this case.
Counsel cited passages from the Income Tax Manual and referredto the following cases: Commissioners of Inland Revenue v. WilliamRamson & Son Commissioners of Inland Revenue v. Maxse1, Commis-sioner of Income Tax v. Steel Bros. & Co., Ltd.‘
M. W. H. de Silva, Acting S.-G. in reply.—-Only deductions allowed arethose enumerated in section 9 and “ outgoings and expenses incurredCited 2 T. C. 387 at 397, 3 T. C. 22 at 37.
Cur. adv. vult.
December 13, 1935. Maartensz J.—
This is a proceeding under the Income Tax Ordinance, 1932. It isbrought before us upon a case stated by the Board of Review upon theapplication of the Commissioner of Income Tax.
The case stated sets out certain facts but the Board has not stated itsfindings upon those facts. We did not refer the matter back to theBoard as the respondents’ contention was that the opinion expressedby the Board upon the point of law dealt with was right, whatever viewwe took of the facts.
The facts shortly stated are as follows :—The respondents, hereafterreferred to as the assessees, are a firm of five partners, all of whom arenot resident in Ceylon, carrying on business in Colombo as money-lenders and in Jaffna as money-lenders, importers of rice from India, andexporters of tobacco to India. The assessees own four sailing vesselsin which they carry their own cargoes to Jaffna as well as cargo for othermerchants.
The shipping business was, according to the assessees, treated as aseparate business controlled from their office in India and carried onquite independently of the business of importing and selling rice in Ceylon.Accordingly, the assessees deducted from the profits made on their
(J889) 58 Ch. p. 123.* (1919) 1 K. B. 647, 12 T. C. 41, 11 T. C. 524.
(1902) A. C. 422 .2 I. T. C. 17 Hal. p. 149. (1926) 11 T. C. 508.
» (1918) L. Ft. 2 K. B. 709.at pp. 520 and 521. Konstam (4th ed.)p. 143.
5 (1925) Income Tax Cases (Indian) ool. II., p. 119.
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business as dealers in rice the freight they would have had to pay if therice was carried to Ceylon in ships not owned by them. The freightdeducted was determined by the freight the assessees charged othermerchants for carrying their goods to Ceylon.
The amount charged as freight is not stated nor is there a findingthat the amount charged is reasonable.
The assessor held that in arriving at the true profits earned in Ceylonfrom the business of importing and selling rice the assessees were notentitled to deduct the full amount of the freights they had chargedthemselves, but were only entitled to deduct the actual cost of carriageto themselves.
The actual cost of carriage is not stated but according to the casestated the assessees accepted the amount fixed by the assessor. Thedifference between the amount of freight the assessees charged them-selves and the actual cost allowed by the Commissioner is Rs. 16,243.
On appeal to the Commissioner, the Assistant Commissioner confirmedthe assessment made by the assessor and the assessees appealed to theBoard of Review. The decision of the Board is as follows : —
“ The Board is of opinion that the appellants, who are non-residents,are entitled to deduct the sum of Rs. 16,243 which is the differencebetween the amount of the actual cost of the carriage of the rice tothemselves, as computed by the assessor, and the amount which theappellants have debited themselves with, on their rice accounts, asthe freight for the carriage of their rice to Ceylon at the rate they wouldhave charged had they carried the rice for someone else.
' The appeal is accordingly allowed and the assessment is reducedby the sum of Rs. 16,243
The Commissioner of Income Tax being dissatisfied with the decisionof the Board of Review, this case was stated by the Board.
The question of law stated is as follows : —“ The question which arisesis whether, in law, the respondents are entitled to claim to deduct, as thecost of carriage of the rice imported into Ceylon for sale in Ceylon, the fullsum with which they have charged themselves as the cost of carriage(such sum being calculated at the rate at which they would have chargedany other person had such rice been shipped to Ceylon by such otherperson) or whether they can only deduct the actual cost of such carriage,the difference between the charges at these different rates being agreedat the above sum of Rs. 16,243.”
The arguments before us proceeded on the footing that it made nodifference whether the assessees carried on the shipping business as anindependent business or not. On behalf of the Commissioner it wascontended that in terms of section 9 of the Income Tax Ordinance onlythe actual costs of carriage to the assessees could be deducted. Onbehalf of the assessees it was contended that, if the profits in the shippingbusiness were separable from the business in rice, the assessees wereentitled to allot to that business as profits the fireight they would haveto pay if the ships did not belong to them.
The question to be decided would be only , of academic interest if theprofits derived by the assessees from the carriage of goods to Ceylon weretaxable in Ceylon, for in that case it would be immaterial whether the
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income tax was paid on the profits of the shipping business or on theprofits of the business in rice. But under the provisions of section 39 (1) -of the Income Tax Ordinance only the profits on goods carried fromCeylon are deemed to arise in Ceylon. The profits which the assesseesseek to exclude from their profits of the rice business are not taxable inCeylon if the contention of the assessees is upheld.
The Solicitor-General relied on the terms of section 9 of the Ordinancewhich provides that, subject to the provisions of sub-sections (2) and (3),there shall be deducted, for the purpose of ascertaining the profits orincome of any person from any source, all outgoings or expenses incurredby such person in the production thereof.
The section further provides that outgoings and expenses shall include(a) such sum as the Commissioner in hia discretion considers reasonablefor the depreciation by wear and tear of plant, &c.;* (b) certain losses onplant, &c., sold or discarded; (c) any sum expended for the repair ofplant, &c.; (d) such sum as the Commissioner in his discretion considersreasonable for bad debts ; (e) interest paid or payable to a banker ;(/) any contribution made by a public officer under the Widows andOrphans Pension Fund Ordinance, 1898 ; (g) any contribution to apension …. fund which may be approved by the Commissioner.
It is unnecessary to refer to the sub-sections which are not materialto the question to be decided.
The Solicitor-General argued that section 9 was exhaustive and thatsubject to the deductions provided for by sub-heads (a) to (g) the asses-sees were only entitled to deduct, for the purpose of ascertaining theirprofits from the business in rice, such outgoings or expenses as wereactually paid out or became payable in the production of those profits ;and that the assessees were therefore not entitled to deduct from thoseprofits the amount of freight which they would have had to pay if theshipping did not belong to them as such amount could not be broughtunder any of the provisions of section 9.
In support of his argument the Solicitor-General referred us to twocases: (1) Dublin_ Corporation v. M’ Adam (Surveyor of Taxes') and (2)Dillon (Surveyor of Taxes) v. Corporation of Haverfordwest
In the first case the assessed profits of the Dublin Corporation includedthe income derived by the Corporation from rates levied by them forwater supplied within the Municipal area and from the sale of waterwithin and without such area.
At the hearing of the appeal by the Commissioners the respondentapplied that the assessment might be amended by excluding therefromthe income derived from rates, and that the Corporation should becharged with duty on the income derived by them from the supply ofwater outside the limits of compulsory supply, and from the supply ofwater within those limits for purposes of trade, manufacture and other-wise, after allowing therefrom a deduction of a proportionate part ofthe expenses.
The decision of the Commissioners was, that the Corporation was liableto pay income tax upon the profit of so much of this waterworks concerni (1887) 2 Tax Cases 387.s (1891) 3 Tax Cases 31.
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as was derived by the supply of water to the extra-municipal area. TheCorporation being dissatisfied with this decision the Commissionersstated a case for the opinion of the High Court.
Falles C.B. made the following observation which was relied on bythe Solicitor-General:—“What we have to consider, in my opinion, iswhether, in relation to the extra-municipal districts, the Corporationof the City of Dublin are carrying on a trade, adventure, or concern inthe nature of a trade ; for if they are, I am clear that whatever surplusmay remain of the receipts incident to that concern over the expensesof that concern is a profit within the meaning of the Act. On the otherhand, I think it is perfectly clear that, in order to bring this case withinthe operation of the Income Tax Act, it is necessary that there shall bethis trading in its strict true sense. There must be, at least, two parties—one supplying water, and the other to whom it should be supplied andwho should pay for it. If these two parties are identical, in my opinionthere can be no trading. No man, in my opinion, can trade with himself ;he cannot, in my opinion, make, in what is its true sense or meaning,taxable profits by dealing with himself ; and in every case of this descrip-tion it appears to be a question on the construction of the Act whetherthe two bodies—the body that supplies and the body or class whichhas to pay—were either identical, or, upon the true construction of theAct, must be admitted to have been held by the Legislature to beidentical, and so legislated for upon that basis ”.
He then held that the Corporation could not make a profit from therates as they were the agents and representatives of the ratepayers, andcould not be treated as in any sense a body distinct from the inhabitantsof Dublin ; but that as regards water supplied to persons or townshipswithin the extra-municipal limits that principle could have no applicationas the suppliers and the persons supplied were distinct persons..
In the second case it was held that a Municipal Corporation owinggasworks and supplying gas free for the public lamps and at a chargeto private consumers could not deduct from the urofits of supplyingprivate consumers the expenses of lighting public lamps.
Charles J. in the course of his judgment made an observation similarto that jf Falles C.B.
It is, I think, perfectly clear from the principle laid down in these twocases that a person cannot be assessed for income tax on profits he mightbe said to have made from himself. Accordingly, if the assessees carriedgoods from Ceylon in their own ships they cannot be assessed for incometax on the profits they would have derived from carrying the goodsof other persons.
On the same principle I am of opinion that the assessees are notentitled to deduct from the profits of the rice business what they wouldhave had to pay in the way of freight to other persons as the profits madein their shipping business, which is not taxable for income tax in Ceylon.
The respondents relied on two cases in which the question for decisionwas whether a business carried on by the assessee was liable to excessprofits duty, and it was held that the proper course when a trade or
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business liable to duty is carried on in connection with a trade or businessnot so liable is to sever the profits of the two businesses and assessaccordingly.
In the first case (Commissioners of Inland Revenue, Appellants, v. WilliamRansom & Son, Limited, Respondents'), “ The respondents, who werea limited company carrying on business as manufacturing chemists andgrowers of medicinal and other herbs, owned a factory where the manu-facture and distillation of herbs were carried on, and they also occupied afarm on which they grew herbs for treatment in the factory. Memorandawere kept of the value of the produce transferred to the factory, of theprices obtained by the sale of incidental crops to the public, and of theexpenses relating to the farm operations. The respondents were assessedto excess profits duty, and on an appeal by them against the assess-ment, the General Income Tax Commissioners found as a fact that therespondents occupied the farm mainly for the purpose of the factory, butthey were of opinion that the occupation of the farm was the businessof husbandry, and that the profits of the farm should be excluded for thepurpose of excess profits duty, and they fixed the assessment on this basis: —“It was held, (1) that on the facts there was evidence on which theGeneral Commissioners could find that the company was engaged inhusbandry, and (2) that as it was possible for the Commissioners toseparate the business of husbandry from the other business, there wasnothing in law to prevent them from doing so.”
The ruling in this case was followed in the case of Commissioners ofInland Revenue v. Maxe 2, where the Court of Appeal held, I quote thehead note, “ That M. was carrying on the profession of a journalist,author or man of letters, and also the business of publishing his ownperiodical. The publishing business should be debited with a fair andreasonable allowance in respect of M.’s contributions, and a propersum for his remuneration as editor, and on that footing he would beliable to duty in respect of his business, but exempt therefrom in respectof his profession.”
The Solicitor-General contended that these cases were decided on thelanguage used in the sections relating to excess profits duty, particularlysub-section (1) of section 40.
Part III. of the Finance (No. 2) Act, 1915, imposes a duty of an amountequal to fifty per cent, on the profits of a business exceeding by morethan two hundred pounds the pre-war standard of profits as defined forthe purposes of this part of the Act.
By section 39 of the Act certain trades and businesses are exemptedfrom payment of this duty.
Sub-section (1) of section 40 of the Act provides that—
“ (1) The profits arising from any trade or business to which thispart of this Act applies shall be separately determined for the purposeof this part of this Act, but shall be so determined on the same principlesas the profits and gains of the trade or business are or would bedetermined for the purpose of income tax, subject to the modificationsset out in the First Part of the Fourth Schedule to this Act and to-
any other provisions of this Act.”
i (101S) I.. Ti.SK. B. 709.
– U919', /,. Tl. 1 K. B. 647.
Kumarihamy v. Dissanayake.
345
In view of the provisions of this sub-section it was necessary, in the twocases referred to, to determine separately the profits of the businessesliable to pay excess profits duty. Accordingly a reasonable allowancewas allowed to be debited, against the profits of the businesses liableto duty in respect of the benefits derived by them from the businesses notliable to pay that duty. But that principle cannot be applied to thecase under consideration where what has to be determined is the profitsto the assessees from the trade or business in rice. The respondentswere not able to refer us to any case in which it was so applied and theabsence of authority is I think against the contention of the respondents.
The respondents also cited the case of The Commissioner of Income Taxv. Steel Bros. & Co., Ltd.1 where the assessees had a head office in London,and it was held that in arriving at the amount of profits assessableunder the Act the head office in London should be allowed a reasonablecommission agent’s commission on the sales and realization of produceshipped from Burma, and such a commission would not be assessable.
This case is of no assistance as no reasons are given for the decisionthat the assessees are entitled to deduct the commission payable to acommission agent. It is certainly not deductable under any of theprovisions of section 9 of our Ordinance.
In my opinion the assessees cannot claim to make a profit in theirshipping business by trading with themselves and are therefore not entitledto deduct from the profits of their business in rice the amount they wouldhave to pay as freight if the rice was carried to Ceylon in the ships ofanother person.
I would accordingly allow the appeal with costs incurred in this Court.The taxable income will stand at Rs. 48,243 and the tax payable atRs. 4,824.30.
Dalton S.P.J.—I agree.
Appeal allowed