078-NLR-NLR-V-64-COMMISSIONER-OF-INLAND-REVENUE-Appellant-and-A.-W.-DAVITH-APPUHAMY-Respondent.pdf
VTSCOUNT RADCLrLFFE—Commissioner of Inland Revenue v.
Davilh Appuhamy
457
[In the Privy Council] '
1962 Present: Viscount Radclifle, Lord Evershed, Lord Jenkins,Lord Devlin, and Mr. L. M. D.* de Silva
COMMISSIONER OF INLAND REVENUE, Appellant,and A. W. DAVTTH APPUHAMY, Respondent
Privy Council Appeal No. 21 of 19628. C. 10 of 1960—Case Stated, BRA/283
Income tax—Profits of a trade or business—Rules for assessing income therefrom—
■■ Permissible deductions—Litigation expenses—Chargeability against profits—
Income-Tax Ordinance (Cap. 188), ss. 9, 10.
When, assessing, for the purpose of income tax, income consisting of the
. profits of a trade or business, the business must be treated as a distinct “ source ”of income. Even though there is only a single individual who is {he owner orproprietor of the business,- the profit emerging is nothing but the figure ofbalance that results from setting the expenditure and other charges againstthe receipts.
*
Accordingly, expenses incurred by the proprietor of a business over litigationwith other persons as to their respective rights to share in the ownership ofthe business cannot be charged against the profits of the business itself.
A PPEAD from a judgment of the Supreme Court.
*
Sir John Senter, Q.C., with 12. K. Handoo, for the appellant.
i i'
jNo j appearance for the respondent.
Cur. adv. wit.
* i ' i•.
-November 12, 1962. [Delivered by Viscount Radoliffe]—
J" !•
i In this appeal the Commissioner of Inland Revenue challenges ajudgment and decree of the Supreme Court of Ceylon dated the 10thJuly, 11961, which allowed to the respondent the deduction of certainexpenses in the computation of his income for assessment under theIncome Tax Ordinance (c.188).
;The respondent was hot represented at the hearing before the Board.The point at issue is a short one, and after hearing the argument pre-sented on behalf of the appellant their Lordships are satisfied that thedecision of the Supreme Court cannot b§ sustained.
20—LXTV
2R 7830—1,883 (2/03)
468 VISCOUNT RADCLXFFR—Commissioner of Inland Revenue v.
Davilh Appuhamy
The facts of the case are very simple and they are found in the casestated by the Board of Review dated the I7th November, 1960, uponwhich the opinion of the Supreme Court was required. Since the year1945 the respondent had been interested in a business called The KandyIce Co.. He seems to have been the owner of it since that year, butat any rate on the 16th August, 1949, a deed of transfer was executedby a Mr. Robert Wilson under which he sold and assigned to the res-pondent the assets and goodwill of the business.
.l
The business was and remained unincorporated, but after the res-pondent’s purchase some proposal was made as between him and certainother persons to form it into a limited company. The proposal fell. through, but litigation followed in which the respondent was sued' bysome of his associates, their claim being that he had acted in the pur-chase as agent for a syndicate and that, as members of the syndicate,they were entitled to participate in the profits of the business. Thisclaim was successfully repelled by the respondent, and the litigationended on the 27th September, 1955, with agreed terms of settlement,under which the respondent was acknowledged to have been as fromOctober, 1945, sole owner of ec all the assets movable and immovable,including the goodwill of the business which was and is called and knownas ‘ The Kandy Ice Company’, which forms the subject matter of thisaction ”, and the plaintiffs withdrew.any claim to any right to or interest• in the assets or goodwill of that business. " The respondent undertookto pay to the plaintiffs a sum of Rs. 76,500, and it was agreed that eachparty should bear his own costs to date of the litigation.
Under the Income Tax Ordinance the respondent was assessable totax upon the profits derived by him from his business, The Kandy IceCo. .In the computation of those profits for the three years ending31st March, 1953, 31st March, 1954 and 31st March, 1955, he claimedto bring in as admissible expenditure the legal expenses. which he hadincurred in resisting the claims of the members of the alleged syndicateto share with him in the ownership of the business. Thus for the firstyear he wished to charge Rs. 3,260 under this head, for the second,Rs. 1,100, and for the third Rs. 2,695.j
. 1 ! .
Tire Income Tax Assessor disallowed the claim. There was an appealto-the Authorised Adjudicator appointed by the appellant in accordancewith the Ordinance. He upheld the Assessor. There was then anappeal to .the Board of Review which accepted the argument of therespondent that the sums in question constituted expenditure incurred“ in the production of income ” within the meaning of the relevantsection of the Ordinance and allowed the appeal. A case was aske4. for and stated for the opinion of the Supreme Court raising the correctlegal questions for their determination. The Court, however, dismissedthe appeal without answering the questions or giving their reasons,merely saying that they agreed with the decision of the Board of Review,
VISCOUNT RADCLIFFE—Commissioner qPIftibrfid Revenue: v. 1 r. . • >459
Davilh Appuhamy
-—~T* Mt,^
In their Lordships’ view the questions raisedjQailvQnly be answeredin the light of those provisions of the Income Tax Ocdi^a^g^Jthnt providethe rules for assessing income consisting of the profits ol-a?trad.e or-busi-ness. ' The business must, of course, be treated as a distinct “ source ”of income for this purpose : if it were not, it would not be possible tofind the basis upon which to identify the receipts, expenditure andother charges attributable to it. The profit emerging is nothing but thefigure of balance that results from setting the expenditure and othercharges against the receipts. The business, therefore, must necessarilybe treated objectively as a separate entity which has allocated to itcertain assets and certain obligations ; and this analysis is required inorder to ascertain its profits even though there is only a single individualwho is its owner or proprietor. If the task of identifying the sourceand so its profits is approached in this way, it seems a somewhat inconsis-tent result that expenses incurred by its proprietor over a dispute withother persons as to their respective rights to share in the ownership ofthe business should be chargeable against the profits of the businessitself. None of its assets is threatened by such litigation nor is theirprofitability in any way affected. As is correctly stated in annexureX 1 to the case stated, which contains the Board of Review’s actualOrder, “ If the plaintiffs had succeeded in this litigation the appellantwould have become entitled only to a certain share of the income fromthe business for the past years and only to a share of the income in the: future. The result of the litigation would not have affected the profitsearned from The Kandy Ice Co., but it could have seriously diminishedthe income of the appellant from this source ” (see para. 4).
There is no doubt that that finding states the position accurately ;but their Lordships think it impossible to say in the light of it that theexpenses claimed are permissible deductions under the rules laid clownby the Income Tax Ordinance for the ascertainment of profits or income(see Chapter III). By S. 9 it is provided that “ there shall be deductedfor the pui pose of ascertaining the profits or income of any person fromany source all outgoings and expenses incurred by such person in theproduction thereof; ” and by S. 10 no deduction is to be allowed in res-pect of any disbursements or expenses not being money expendedfor the purpose of producing the income If, then, these litigationexpenses related to an issue whose outcome would not have affectedthe profits of the. business one way or the other but would have affectedonly the respondent’s share as owner of them, how can they be saidto have been expended in the production of the profits from this taxablesource, so as to satisfy the requirements of Sections 9 and 10 V
Words very similar to those used in Sections 9 and 10 have alreadybeen under the consideration of the Board in dealing with the Landand Income Tax Act 1916 of New Zealand, see Ward and Co., Ltd. v.Commissioner of Taxesx. The rule then in question was expressed
1 {1923) A. C. 145.
400-
VISCOUNT RAUCEEFFE—Commissioner of Inland Revenue v.
Davilh Appuhamy
in the form that no deduction was to be made in respect of expenditure“not exclusively incurred in the production of the assessable income”.In both cases emphasis is thrown upon the criterion that it is the effect •of the expenditure in contributing to the income of the designated source,that is to be considered. The opinion of the Board, delivered by LordCave, held that the disqualification imported by the rule required thatallowable expenditure must have been incurred “ for the direct purposeof earning profits”. This requirement was evidently regarded by themas a highly restrictive one : for it was treated as having the effect ofdisallowing expenditure intended to influence public opinion againstprohibition of intoxicants, a measure which, if introduced, would cer-tainly have had a destructive effect upon the profits of the businessof the brewing company, the assessee concerned. Such expenditurethough disallowed was related to the maintenance of the business itself,the value of its goodwill and ,the preservation of its profitability in, atany rate, a recognisable sense. The expenditure in question here hasno comparable claim to recognition.
Their Lordships have no wish to assert the principle.that the decisionin Ward's case supra lays down a comprehensive rule for deciding all thevarious cases that may arise with regard to chargeable expenditure,when words such as those found in the New Zealand Act and the GeylonOrdinance are employed by a legislature. The distinction betweenexpenditure to earn profits and expenditure to- avoid losing profits isitself a fine one, and cases may yet arise.in which expenditure, thoughnot in a direct or obvious sense creating profits, is yet attributable tothe production of them. But this case is not one of them—the jex-penditure here in question is simply the cost incurred by the' ownerof an income-producing source in fighting out between himself andothers their respective claims to the ownership of that source, -j. r.
It would not be useful to the determination of this appeal to refer todecisions given in the United Kingdom on questions more or less ana-logous to this one, because the forms of the respective statutory pro-visions are not the same and it has been recognised, on the one handin the Ward case, that English authorities are not necessarily applicableto such legislative rules as those enacted in New Zealand, and, on theother hand in the majority decision of the House of Lords in Morgan v.Tate and- Lyle Ltd.1, that the Ward decision does not necessarily applyto cases arising under the United Kingdom system of taxation. Itis sufficient to say that their Lordships express no view one way or theother as to whether this case ought to be decided differently if it aroseunder the latter system.
Their Lordships will humbly advise Her Majesty that the appealshould be allowed ; that the decision of the Board of Review dated the17th November, 1960, and the judgment 'and decree of the SupremeCourt of Ceylon dated the 10th July, 1961, be reversed ; that in lieu
1 (1955) A. C. 21.
Lebbe v. Sandanam
461
thereof the following answers should be returned to the questions raisedby the case stated by the Board of Review on the 29th September,1960:—
No,
No,
No,Yes,
No answer required ;
and that the respondent should be ordered to pay the costs of the appellantof the hearings before the Board of Review and the Supreme Court.
Appeal allowed.