TAMBTATT, J.—J. A. P. Zebedee Fernando da Co. v. Commissioner of
Present: Sansoni, J., and Tambfah, J.
J.A. P. ZEBEDEE FERNANDO & GO., Appellant, and
THE COMMISSIONER OF INLAND REVENUE, Respondent
S. C. 7j60—Income Tax Case Stated BRA j281
Income tax—Profits of a non-resident person carrying on a wholesale business inCeylon—Computation—Assessment of income tax due from such profits—Income Tax Ordinance, ss. 34 (1), 36 (3), 37, 65 (2) (b).
Where a person in Ceylon, acting on behalf of a non-resident person, sellsby wholesale any property manufactured by the non-resident person outsideCeylon, proviso (a) to section 34 (1) of the Income Tax Ordinance is applicableand- for the purpose of income tax, the profit made by such sale is deemed to benot more than the profit which might reasonably be expected to be madeby a merchant selling the property by wholesale in Ceylon. The merchantcontemplated in the proviso to section 34 (1) is not a merchant who buys froma non-resident manufacturer and sells the commodity in Ceylon, but anymerchant wl o sells it by wholesale in Ceylon.
Accordingly, evidence of the rate of commission paid to an agent cannotbe used as a basis of measure of the profits of a merchant contemplated inproviso (a) to section 34 (1).
GaSE stated under section 74 (1) of the Income Tax Ordinance.
H. V. Perera, Q.C., with S. Ambalavaner, for the Assessee-Appellant.
A. Mahendrarajah, Crown Counsel, with M. Kanagasunderam,
Crown Counsel, for the Commissioner of Inland Revenue, Respondent.
Cur. adv. vult.
February 15, 1961. Tambiah, J.—
This is a case stated for the opinion of this Court by the Board ofReview under section 74 (1) of the Income Tax Ordinance. TheAppellant-assessee is an agent in Ceylon for a large number ofnon-residents who carry on a business in Ceylon in the sale of dry fishby wholesale. It is common ground that the dry fish is made bythese non-residents outside Ceylon. The Appellant as agent for thenon-resident consignors sold by wholesale the consignment of dry fishreceived in Ceylon and remitted the proceeds of the sale to theconsignors abroad,' and received a commission on such sales, whichranged from 4 per cent, to 6 per cent.
The assessee has shown the amounts he has received by way of com-mission in the returns sent by the partners of the business, but noneof the non-resident consignors of dry fish carry ins on business in Ceylonhave produced any books of accounts or other documents from whichthe taxes due could be assessed.
TAMBIAH, J.—J. A. P. Zebedee Fernando <Ss Co. v. Commissioner of 257
It is also common ground that the Commissioner of Income Tax, actingunder section 37 of the Income Tax Ordinance, up to and including theyear of assessment 1953-54, Assessed the profits of the non-residentconsignors at 5 per cent of the turn over of the business in Ceylon.
. When the assessment made under section 37 was increased in respectof the year of assessment 1953-54 five of the non-resident consignorsof dry fish appealed to the Commissioner of Inland Revenue against theincreased assessment. At the hearing of the appeal against tbe increasedassessment for the year 1953-54, the Commissioner for Inland Revenuemade the following order :—
“ Assessment to be revised estimating profits at 5 per cent of theturn over as previously. Separate assessments to be issued fornon-residents with income over Rs. 10,000/- and for those withincome below Rs. 1,000/-. I inform appellants that as from the yearof assessment 1954-55 profits will be estimated at 7 per cent and forsubsequent years at 10 per cent of the turn over.”
On 1.4.54 the Assessor sent a circular to all the agents of the non-residentconsignors carrying on business in Ceylon stating that unless detailedaccounts were submitted he would assess the profits at the rate of 7 percent and 10 per cent of the turn over for the assessment years 1954-55and 1955-56 respectively. As to the propriety of the arbitrary impositionin advance of taxes not yet fallen due I shall comment later. Theassesses and all others to whom the circular was sent did not, however,produce any accounts of the business done by them for their non-residentprincipals. The assessor made an assessment of the profits made inCeylon by the non-residents for whom the assesses acted as agent., undersection 37 of the Income Tax Ordinance, and fixed the assessment ofprofits at 7 per cent of the turn over for the year of assessment 1954-55and at 10 per cent of the turn over for the year of assessment 1955-56 and1956-57. The assessee appealed to the Commissioner of Inland Revenueagainst the assessment made, and the appeal was heard by an authorisedadjudicator. Before the adjudicator the assessee produced a statement(marked Al) which was prepared by the assessee’s accountant, who wasalso the accountant of the firms referred to in Al. The firms referred toin Al are traders in dry fish who purchase tbe commodity from importersand sell by wholesale. The adjudicator confirmed the assessment ofthe assessor and the appellant appealed to the Board of Review from thedecision of the adjudicator.
At the hearing of the appeal before the Board the following conten-tions were made on behalf of the assessee :— 1
(1)An assessment made under section 37 of the Income Tax Ordi-nance is subject to the limitation placed by section 34 of theOrdinance.
258TAMBIAH, J.—<7. A. P. Zebedee Fernando & Co. v. Commissioner of
The statement A1 was evidence that the profit made in Ceylon
by a wholesale dealer in dry fish was 3 per cent to 5 per centof the turn over. Non-resident consignors who carry on awholesale business in Ceylon should not exceed 5 per centof the turn over.
On behalf of the Commissioner of Inland Revenue it was contendedthat:—
The proviso to section 34 of the Income Tax Ordinance appliesonly to non-residents who manufacture the goods sold outsideCeylon, and export the manufactured goods to Ceylon andsell the imported goods by wholesale in Ceylon.
. (2) The profit made in Ceylon by a non-resident manufacturer whoexports the manufactured goods to Ceylon and sells thesame by wholesale is deemed to be the profit made on thesame goods by a merchant selling the property by wholesale.This profit would be that made by a merchant in Ceylonwho imports the same goods and sells by wholesale.
The firms referred to in the statement A1 are not importers of
dry fish who sell by wholesale. The profit made by the firmsmentioned in A1 is not evidence of the profit made in Ceylonby the non-resident importers who sell dry fish by wholesale.
The non-residents paid a commission of 4 per cent to 6 per cent
on the turn over to their agents in Ceylon. In the absenceof any other evidence of the true amount of the profits madeby the non-residents, the computation of their profit at 7 percent of the turn over for the year 1954^55 and 10 per centof the turn over for the subsequent years was a fairassessment.
The Board of Review, after setting out the facts and the proviso tosection 34 of the Income Tax Ordinance, stated as follows :—
“ The non-resident consignors chargeable with tax in this case areimporters who sell wholesale and are accepted for the purpose of thisappeal as manufacturers or producers of the dry fish. The firmsmentioned in A1 purchase from importers and sell wholesale. Manu-factured goods may pass through the hands of many persons beforethese reach the consumer. The profit made by any one of theseintermediaries cannot be based on the profit made by a subsequentintermediary. The proviso to section 34 does not sanction such anassessment to tax. If the income of an importer selling wholesalehas to be assessed on the income of another it must be the incomeof a person in a comparable position in the same trade. It must bethe income of another importer selling wholesale dry fish of the samenature and quality and on identical commission. We are thereforeof opinion that the assessor was right in not acting on the informationin A1
TAMBIAH, J.—J. A. P. Zebedee Fernando <& Oo. v. Commissioner of 259
The Board confirmed the assessment of the assessor on the ground■that the non-resident consignors of dry fish carrying on wholesalebusiness in Ceylon had, by not submitting their accounts, failedfo^discharge the burden of proving that the assessment was excessive.
The case stated for the opinion of this Court raises the following points,■as set out in B2 :—
Whether the Board of Review has misdirected itself in holding
that the evidence led by the appellant as to the profits of amerchant selling the property by wholesale was not that ofthe merchant contemplated under section 34 (1), proviso (a).
Even if the evidence led did not relate to the merchant contem-
plated under section 34 (1) proviso (a), should not the nextbest and only evidence led as to the profits of a merchanttrading wholesale be accepted.
Whether evidence of the rate of commission paid to an agent can
be used as a basis of measure of the profits of a merchantcontemplated in section 34 (1) proviso (a) and, if not, whetherthe only inference that can be drawn is that appellant’sevidence stands unchallenged and should be accepted.
Whether the assessment made on the basis of a ruling by the
Commissioner of Inland Revenue and not on any disclosedevidence as to the profits of a merchant trading wholesalecan be sustained.
Section 34 (1) of the Income Tax Ordinance reads as follows
“ Where a person in Ceylon, acting on behalf of a non-residentperson, effects or is instrumental in effecting any insurance or sellsor disposes of or is instrumental in selling or disposing of any propertywhether such property is in Ceylon or is to be brought into Ceylonand whether the insurance, sale, or disposal is effected by such personin Ceylon and by or on behalf of th,e non-resident person outside Ceylonand whether the moneys arising therefrom are paid to or receivedby the non-resident person directly or otherwise, the profits arisingfrom any such insurance, sale, or disposal shall be deemed to be derivedby the non-resident person from businesses transacted by him in Ceylonand the person in Ceylon who acts on his behalf shall be deemed to behis agent for all the purposes of this Ordinance.”
The proviso to this sub-section was introduced by an amendmentwhich came into operation on 2.2.1956. It reads as follows :—
<c Provided that, where the property sold or disposed of is produced
or manufactured by such non-resident person outside Ceylon, •the profits from the sale or disposal shall—
(a) If the sale or disposal was by wholesale, be deemed to be notmore than the profits which might reasonably be expectedto be made by a merchant selling the property by wholesale,and
TAMBIAH, J.—J. A. P. Zebedee Fernando & Co. v. Commissioner of
(&) if the sale or disposal was by retail, be deemed to be not morethan the profits which might reasonably be expected to bemade by a merchant selling the property by retail. ”
Mr. H. V. Perera contended.that considering the hazards incurred bya manufacturer who sells his goods in Ceylon and in veiw of the factthat he has to incur expenditure in the process of manufacture, storingand export, and his liability to pay taxes in his own country, amanufacturer who sells goods wholesale in Ceylon is given a taxconcession by the proviso to section 34. The Crown Counsel whorepresented the Respondent urged that the word “ merchant ” shouldin the context of the proviso be read as a non-resident merchant.He contended that the merchant referred to in the proviso is necessarilythe non-resident person referred to in the opening lines of section 34 (1).He urged that the statement A1 did not contain the profits made by anon-resident merchant who manufactured and sold dry fish by wholesalein Ceylon, and therefore the Board of Review should ignore the provisionsin the proviso to section 34 of the Ordinance. He added that if theword “ merchant ” were given any other interpretation, then the legis-lature would be making an invidious distinction between a non-residentmanufacturer and a wholesale dealer who is a manufacturer, since thetax concession is given only to the former and not to the latter.
In interpreting statutes, “ the first and most elementary rule ofconstruction is that it is to be assumed that the words and phrases oftechnical legislation are used in their technical meaning if they haveacquired one, and, otherwise, in their ordinary meaning ; and, secondly,that the phrases and sentences are to be construed according to the rulesof grammar. From these presumptions it is not allowable to departwhere the language admits of no other meaning. Nor should therebe any departure from them where the language under considerationis susceptible of. another meaning, unless adequate grounds are found,either in the history or cause of the enactment or in the context or inthe consequences which would result from the literal interpretation, forconcluding that that interpretation does not give the real intentionof the Legislature.” (See Maxwell on the Interpretation of Statutes,8th Edition, p. 2.)
Another cardinal rule of interpretation is that “ the language of Actsof Parliament, and more especially of modem Acts, must neither beextended beyond its natural and proper limits, in order to supplyomissions or defects, nor be strained to meet the justice of an individualcase ”. (See Craies on Statute Law, 5th Edition, p. 68).
“If”, said Lord Brougham .in Gwynne v. Burnell (1840, 7C1. & F.572, 696) “we depart from the plain and obvious meaning on accountof such views (as those pressed in argument on 43 Geo. 3.C.99), we donot in truth construe the Act, but alter it. We add words to it, or varythe words in which its provisions are couched. We supply a defect
• TAMBIAH, J.—j. A. P. Zebedee Fernando & Co- v. Commissioner of 261
which, the Legislature could easily have supplied, and are making thelaw, not interpreting it. This becomes peculiarly improper in dealing witha modem Statute, because the extreme conciseness of ancient statuteswas the only ground for the sort of legislative interpretation frequentlyput upon their words by the Judges. The prolixity of modem statutes,so very remarkable of late, affords no grounds to justify such a sort ofinterpretation ”. This dictum is equally applicable to our modemstatutes.
The word "non-resident” occurs several times, not only in section 34but also in other sections of the Income Tax Ordinance and if it wasthe intention of the Legislature to use the words " a merchant ” inthe Proviso to section 34 so as to mean a non-resident merchant, itwould not have failed to state so or use appropriate words to limit, theordinary connotation of the word “ merchant
If one takes the view that the words, " a merchant selling property bywholesale”, refer to any merchant in Ceylon who sells the commodityby wholesale, it may be contended that the profits made by a merchantwho sells the commodity may vary and therefore the Assessor maybe unable to find out the profits of such a merchant. Mr. H. V. Pererastated that in such an eventuality the assessor could accept the highestprofits of such a merchant or may take the mean of the profits of merchantswho sell the article in question by wholesale.
Adverting to the contention of the Crown Counsel that unless theword "merchant” in the proviso to section 34 is read as non-residentmerchant, an invidious distinction would be made between a non-residentwholesale merchant and a non-resident merchant who is a manufac-turer, it may well be that the Legislature deliberately made the dis-tinction, and gave a concession to the latter for the reason that theconsumer in Ceylon would be in a position to buy the commodity inquestion cheaper if manufacturers were encouraged to sell their goodsin Ceylon without an intermediary. Further, as Counsel for the Appellantcontended, it may be that the Legislature, having considered the risksthe manufacturer undertook in selling his goods in Ceylon, gave him aconcession. Whatever may be the underlying reason for the introductionof the proviso to section 34 the Legislature has thought fit to give tax-concessions to non-resident manufacturers who sell the goods theymanufacture in Ceylon.
The Proviso to section 34 states that in taxing a non-resident manu-facturer of goods who sells such goods in Ceylon the profits shall “ bedeemed to be not more than the profits which might reasonably beexpected to be made by a merchant selling the property by wholesale ”.We are of the view that in such case a ceiling of the profits has beenplaced beyond which he cannot be taxed.
A consideration of the phraseology in section 36 (3) of the IncomeTax Ordinance shows that the word “ merchant ” in the section must
262TAMBIAH, J.—J. A. P. Zebedee Fernando db Co. v. Commissioner of .
be given the meaning it has in ordinary parlance. If the taxes arelevied under section 36 (3), a lower ceiling is fixed by section 36 (3), andthe profits of such non-resident persons from the sale of such goodsor produce are to be deemed to be not less than the profits which mightreasonably be expected to have been made by a merchant “ who hasbought the same direct from a manufacturer or producer with whom hewas not connected ”. The learned Grown Counsel conceded thatthe word “merchant” in this section cannot be interpreted to meannon-resident merchant. It is an accepted canon of interpretation thatthe same words occurring in different parts of a particular statutemust be presumed to bear the same meaning, unless the context is suchthat a different meaning has to be given by implication. (Maxwell onthe Interpretation of Statutes, 8th Edition, p. 276-277.) If the word“ merchant ” has to be given its ordinary meaning in section 36 (3)there is nothing in the context to justify us in in giving a differentmeaning to this word in the proviso to section 34.
Although the onu& of proof is on the assessee, the appellant hasproduced before the Board of Review the statement of profits (Al), madeby merchants who imported dry fish in Ceylon for the relevant period.The Respondent has not questioned the correctness of these accountsand presumably has taxed the merchants referred to in Al on the basisthat these accounts were correct. In the absence of any other evidenceplaced before the Board of Review, I am of the view that the Boardshould have acted on these figures in estimating the profits of the merchantwho sold dry fish by wholesale in Ceylon. It is not clear on what basisthe Commissioner of Income Tax stated in advance, by the circularletter of 1.4.54, that for the years of assessment 1954-55 and 1955-56he would tax at the rate of 7 per cent and 10 per cent respectively. Inimposing the tax for those years he appears to have been influenced bythe view he stated in advance. I do not think that a tax authoritycould arbitrarily fix the tax for the future. His power is limited tothat of fixing taxes for a particular period under consideration.
The Counsel for the respondent contended that section 65 (2) (6) ofthe Income Tax Ordinance gives him unfettered power to estimate theincome of an assessee whose returns are not accepted. But, under thissection he has only the power to estimate when a person has furnisheda return of income. Further in veiw of the limitation placed by theproviso to section 34, in the present case he is precluded from fixingthe rate of income beyond the ceiling set out in the proviso. Similarly,although section 37 of the Income Tax Ordinance gives him wide powersof computing the profits, of a non-resident person carrying on businessin Ceylon, whose accounts cannot be readily ascertained by computingthe profits on a fair percentage of the turn over, the Assessor cannotoverride the proviso to section 34 which fixed an upper ceiling to suchprofits.
. TAMBIAH, J.—-J. A. P. Zebedee Fernando do Co. v. Commissioner of 263
We answer the questions of law submitted to us in the document,marked B2, as follows :—
The Board of Review has misdirected itself in holding that the
evidence led by the appellant as to the profits of a merchantselling the property by wholesale was not that of a merchantcontemplated in section 34 (1) proviso (a). We are of theview that where a person in Ceylon sells or disposes of anyproperty wholesale by or on behalf of a non-resident outsideCeylon, who manufactures such goods, the proviso to section34 applies and for the purpose of income tax the profitsof such sale or disposal are deemed to be not more than theprofits which might reasonably be expected by the merchantselling the property by wholesale in Ceylon. The words“ a merchant ” mean any merchant belonging to the categoryset out in the proviso to section 34. The merchant contem-plated in the proviso is not a merchant who buys froma non-resident manufacturer and sells the commodity inCeylon, but any merchant who sells it by wholesale in Ceylon.
In view of the interpretation we have placed on the proviso
to section 34, the question of law formulated in paragraph2 of B2 does not arise.
I am of the opinion that in the instant case, evidence of the rate
of commission paid to an agent cannot be used as a basisof measure of the profits of a merchant contemplated inproviso (a) to section 34 (1) in veiw of the unchallengedevidence contained in Al. In the light of the constructionwhich I have placed on the proviso to section 34 (1), theprofits shown in Al should be regarded as the basis for thecomputation of the tax,
In view of the answers given above, it would be unnecessary
to answer the abstract question of law set out in paragraph 4of B2.
As stated earlier, the proviso to section 34 (1) was operative onlyfrom 2.2.56. The Crown Counsel contended that no restrictions wereplaced on the assessor in imposing any tax he wished for the periodprior to that date. In view of the fact that the assessment for theperiod 1953-54 was computed on the footing that a wholesale dealerin dry fish was only making a profit of 5 per cent and the uncontradictedevidence furnished by Al, the assessor has no basis on which to taxthe assessee other than 5 per cent of the turn over of the business for thisperiod. It would hence be fair to hold that 5 per cent was the profitmade by a wholesale dealer in the commodity for the periods 1953-54 and1954—55. The case is sent back to the Board of Review with our opinionon the points of law set out and with the direction that the profits of the
SANSONI, J.—Stephen v. The Queen
appellant assessee should be computed at the rate of 5 per cent of thetotal turn over of the sale during the assessment years 1953-54, 1954r-55and 1956-57.
The appellant is entitled to the costs of the appeal.
Sansoni, J.—I agree.Appeal allowed.
J. A. P. ZEBEDEE FERNANDO & CO., Appellant, and THE COMMISSIONER OF INLAND REVE