009-NLR-NLR-V-64-COMMISSIONER-OF-INLAND-REVENUE-Appellant-and-D.-B.-J.-DE-SILVA-Respondent.pdf
Commissioner of Inland Revenue v. de Silva
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Present: T. S. Fernando, J., and Tambiah, J.
COMMISSIONER OP INLAND REVENUE, Appellant, and
B. J. DE SELVA, Respondent
S. C. 2 of 1960—Income Tax Case Stated BRA'269
Income tax—Assessable income—Deductions from statutory income?—Annuity ”—■ 4‘Expenditure of a capital nature ”—Income Tax Ordinance (Cap. 188), ss. 10,' 13 (1) (a).
' The assesses, -Who was a medical practitioner, purchased from S a businessof a dispensary carried on by S. He agreed to pay a sum of Rs. 6,000 as part. • payment for the transfer of the business of the dispensary, and to continue to payto S for thirteen months thirty per cent.-of the gross monthly income derivedfrom the business of the said dispensary.
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T. S. FERNANDO, J.—Commissioner of Inland Revenue v. de Silva
Alter the sum of Rs. G,000 had been paid, the assessee paid to S, during theperiod 1st April 1954 to 31st July 1954, a sum of Rs. 6,706, being thirty porcent.of the gross monthly income from the dispensary. He then claimed to deductthis sum of Rs. 6,706 in computing his assessable income for the rolovant yearof assessment.
Held, that the monthly sums stipulated for in the agreement were in roalitypart of the purchase price and therefore constituted payments of a capitalnature and not a payment by way of annuity within the meaning of section13(1) (a) of the Income Tax Ordinance. It followod that the assessee was notontitlod to have the sum of Rs. 6,706 deducted in the ascertainment of hisassessable incomo.
•
G ASE stated in terms of section 74 of the Income Tax Ordinance(Cap. 188).
A. C. Alles, Deputy Solicitor-General, with H. L. de Silva, CrownCounsel, for the appellant.
M. Tiruchelvam, Q.C., with Clarence de Silva and K. Thevarajah,for the respondent.
Cur. adv. vult.
July 12, 1961. T. S. Fernando, J.—
This matter comes up before us by way of a case stated in terms ofSection 74 of the Income Tax Ordinance on a question of law. It hadbeen the practice of the Board of Review to formulate the question orquestions of law arising on a case, but we were informed by counsel atthe hearing that this practice has been discontinued in view of theobservations of this Court in the case of Fernando v. Commissioner. of.Income Tax V
The facts relevant to the question that calls for answer in this case arerelatively simple. The assessee who was a doctor in practice at therelevant times started practice in partnership with one A (anotherdoctor) at a place called Maharagama in August 1952. For the purposeof this partnership business, doctor A by an agreement of 5th August1952 (which I shall hereinafter refer to as agreement Al) purchased fromone S (who was not a doctor) a business of a dispensary carried on by S,also at Maharagama. The agreement provided that A shall pay as a partpayment a sum of Rs. 6000 on 5th August 1952, and thereafter continueto pay to S for a period of twenty-four months commencing from 5thAugust 1952 and ending on 4th August 1954 thirty per cent of the gross-monthly income derived from the business of the said dispensary.
. In July 1953 A withdrew from the partnership, and the businesswas continued thereafter by the assessee as his sole business. He enteredinto an agreement (which I shall hereinafter refer to as agreement A.2)
1 {1959) 61 N. L. R. 313.
T. S. FERNANDO, J.—Commissioner of Inland Revenue v. de Silva
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-on 8th July by which he agreed to pay a sum of Rs. 6,000 as part paymentfor the transfer of the business of the dispensary, and to continue to payto S for the thirteen months commencing from July 1953 and ending on4th August 1954 thirty per cent, of the gross monthly income derivedfrom the business of the said dispensary.
In spite of the form in which agreement A.2 was drawn up, it wasreally designed foT the continuance in force of the bargain struck by theagreement A. 1 between S and the assessee’s partner A as is evidenced bythe circumstance that the assessee was not called upon by S to make thepart payment of Rs. 6000 which sum had already been paid by A on 4thAugust 1952.
The question that has to be adjudicated here is one familiar in casesarising out of the law relating to income tax, viz. whether a particularsum has been paid out by way of an instalment of capital or whetherit is a payment in the nature of an annuity.
During the period 1st April 1954 to 31st July 1954 the assessee paidto S a sum of Rs. 6708/-, being thirty per cent of the gross monthly incomefrom the dispensary. Having paid this sum he claimed to deduct it incomputing his assessable income for the relevant year of assessment. Inthe ascertainment of the profits or income of any person from any source,Section 10 of the Income Tax Ordinance provides that no deductionshall be allowed in respect of
“ (c) any expenditure of a capital nature or any loss of capital;
(i) any annuity, ground rent, or royalty. ”
In the ascertainment of the assessable income of a person however,Section 13 (1) of the Ordinance permits the deduction from that person’sstatutory income computed in accordance with the Ordinance of
“ (a) sums payable by him by way of annuity, ground rent or royalty: ”
If, therefore, the payment of a sum of Rs. 6706 can be regarded in lawas payment of an annuity, the assessee is entitled to have that suradeducted from his income before tax i3 computed, while he is not soentitled if the payment constitutes a payment of or by way of capital.
A similar question, arising in circumstances not very different to thosewith which we are here concerned, came up for consideration recentlyby this Court in the case of The Commissioner of Inland Revenue v.Nilgiriya1 (S. C. No. 2 of 1959—Income Tax Case Stated No. BRA-260—vide S. C. Minutes of 23.11.60) and this Court held, interpretinga particular agreement, that certain monthly payments of instalmentswere of a capital nature and did not constitute payment of an annuity.Mr. Tiruchelvam has sought to distinguish that case as being one wherethe aggregate of the monthly instalments to be paid amounted almostexactly to the fixed sum payable under the agreement, and that the
1 (1960) 63 N. L. R. 176.
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T. S. FERNANDO, J.—Commissioner of Inland Revenue v. de Silva
agreement the Court there was concerned with, was such that it- wasequated to an agreement by which provision had been made for thepayment of a debt in monthly instalments.
Several English cases were cited to us bearing on the question of- thedifference between the payment of a capital sum and that of an annuity.The effect of the cases decided prior to 1919 is so well summarised in thejudgment of Rowlatt, J. in Jones v. The Commissioner of InlandRevenue1 that I can do no better than reproduce that learned judge’swords : —
“ but, as I said during the argument, I do not think there is anylaw of nature, or any variable principle, that because you can say acertain .amount is consideration for the transfer of property, thereforeit must be looked upon as the price in the character of principal. Itseems to me that you must look at every case, and see what the sum is.A man may sell his property for a sum which is to be paid in instalments,and when you see that that is'the case, that is not income or any partof it—that was the case of Foley v. Fletchera. A man may sell hisproperty for what is an annuity, that is to say, he causes the principalto disappear and an annuity to take its place. If you can see thatthat is what it is, then the Income Tax Act taxes it. Or a manmay sell his property for what looks like an annuity, but you can seequite well from the transaction that it is not really a transmutationof a principal sum into an annuity, but that it is really a principalsum the payment of which is being spread over a time, and is beingpaid, with interest, and it is all being calculated in a way familiar toaccountants and actuaries, although talcing the form of annuity.That was Scoble’s case3—when you break up the sum and decide what• it really was. On the other hand a man may sell his property nakedlyfor a share of the profits of a business, and if he does that, I thinkthe share of the profits of the business would be undoubtedly theprice paid for his property, but still that would be the share of theprofits of the business and would bear the character of income in hishands, because that is the nature of it. It was a case like that whichcame before Mr. Justice Walton in Chadwick v. Pearl Life AssuranceCompany*. It was not the profits of a business, but a man was clearlybargaining to have an income secured to him, and not a capital sumat all, namely, the income which corresponded with the rent whichhe had before.”
Mr. Tiruchelvam, I should add, relied strongly on the actual decisionin the case of Jones v. The Commissioner of Inland Revenue (supra), butit is necessary to remember that it was only the payment of certain“ further royalty ” by way of an additional consideration that was heldin the special circumstances of that case not to constitute part of thecapital sum.
1 (1919) 7 Tax Cases at 315.3 4 Tax Cases 618.
* (1858) 2S L. J. Ex. 100.« (1905) 2 K. B. 507.
T. S. FERNANDO, J.—Commiaaioner of Inland Revenue v. de SilvaG9
In Commissioners of Inland Revenue v. Ramsay1, where the Court wascalled upon to construe the terms of an agreement for the purchase of adental practice, it was contended that the practice was sold not for afixed capital sum, but for a payment down and further annual sumsof the nature of income payment. The Court held, however, that thedescription given to such payments in the agreement was immaterialand that the annual sums paid under the agreement were instalments ofcapital. Dott v. Brown 2 was a case concerning an agreement of compro-mise in respect of a sum of money owed by which the debtor, inter alia,covenanted to pay to the creditor two sums of money of £1000 each onspecified dates and a sum of £250 on each succeeding March 31st so longas the creditor shall live, such covenant to bind the debtor’s estateafter his death. It was held that the annual payments were instalmentsof capital and not of income and that the debtor was not entitled to makeany deductions in respect of income tax.
Two other cases, (1) Lamport and Holt Line Ltd. v. LangweU 3 and (2)Commissioners of Inland Revenue v. Ledgard *, cited to us need examina-tion. They had both been also brought to the notice of the Board ofReview. In Lamport’s case (supra) the question arose whether certainpayments made to vendors of some company shares were in the nature oftrading receipts or whether they were instalments on account of thepurchase price. Jenkins L.J., in the course of delivering his judgment inthe Court of Appeal holding that the payments were in the natureof trading receipts, stated—at page 200 :—
“ The question in all cases of this sort must be whether there is anagreement to sell at an ascertained or ascertainable price, with a provisionmade for that price to be paid wholly or in part by instalments. Inthat class of case, broadly speaking, the payments are capital. Or isthere an agreement to sell in consideration of periodical paymentsamounting to an annuity, so that the payments cannot be regarded asinstalments of a capital sum but are referable to the vendor’s right toreceive an annuity ? In that class of case, generally speaking, theannual payment is to be regarded as income. The matter is one whichturns on the construction of each particular agreement. ”
Turning to an examination of both agreements A. 1 and A. 2 the paymentof Rs. 6000 is referred to specifically as a part payment. It has not beenand it cannot be questioned that that was a payment by way of a capitalnature. The payment of the instalments stipulated for in the agreementsis referred to as a continuation of payment. The learned DeputySolicitor-General contended that the parties were throughout stipulatingfor payment of the purchase price of the business of the dispensary,and that a part payment of Rs. 6000 having been made, an agreementwas reached as to the manner in which the balance of the purchase priceof the business of the dispensary was to be paid over. Mr. Tiruchelvam,1 (1935) 20 Tax Caaea 79.3 (1958) 38 Tax Cases 193.
* (1936) 1 A. E. R. 543.4 (1937) 21 Tax Cases 129.
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on the other hand, argued that by stipulating to receive the instalmentsS was bargaining to secure for himself the right to receive an income.In support of his argument, he pointed to the fact that in respect of theinstalment payments there is no fixed sum agreed upon, but uncertain’sums dependent upon the gross monthly income from the dispensary.This argument is, in my opinion, met sufficiently by the decision inLedgard’s case (szipra) which concerned the interpretation to be placed onan agreement of partnership between architects, one of the clauses ofwhich provided that on the death of one of the partners the purchase*money for the share of the deceased partner shall be such a sum- as thepersonal representatives of the deceased partner and the survivingpartners may agree upon, and, failing agreement, shall be a sum equal toone half of the share of profits for three years commencing from the firstday of the month immediately following the death of such , partner whichwould have been payable to such deceased partner had he continued.to bea partner during the said period of three years. One of the partnersof the firm of architects died, and sums of money representing the purchase,money of the share held by the deceased calculated on the basis set outin the agreement were paid in instalments to the personal representativesof the deceased partner. It was contended on behalf of the purchasersthat these instalments were annual payments and not instalments of acapital sum. Lawrence J., holding that the payments were instalmentsof capital stated—(see page 135) :—.
“ It is erroneous to say that this is not a capital payment because thepurchase money for the deceased partner’s share is to be dependentupon what the profits of the business are for. the three years succeedingthe death of the deceased partner. It is, I think, a fairly commonmethod of arriving at the value of a share in a business, a large part ofwhich share is dependent upon goodwill, to ascertain the value’of thatshare by reference to the profits of business over a certain term of,years
and the fact that annual profits, which are, of course, of an
income character, are used as the measure of the sum does not affectthe quality of the sum which is arrived at by that method. **'.
The Board of Review was, in my opinion, wrong in. concluding thatLamport's case (supra) was more in point than the case of Ledgard (supra)and, construing the particular agreement we are concerned with on thiscase stated, it does not appear to me to be difficult to conclude that the• monthly statements stipulated for in the agreement were in reality partof the purchase price and therefore constitute payments of a capitalnature and not a payment by way of annuity. It follows that theassessee is not entitled to have the sum of Rs. 6706/— deducted in theascertainment of his assessable income.
Tlie assessee must pay the costs of this appeal.
Tambiah, J.—I agree.
Appeal allowed.