Peiris v. Commissioner of Income Tax.
1936 Present: Macdonell C.J., Dalton S.P.J., and Poyser J.
PEIRIS v. COMMISSIONER OF INCOME TAX54—(Inty.) Special.
Income Tax—Retirement of public officer on pension—Liability to tax of com-muted gratuity and pension paid between date of retirement and end ofperiod of assessment—Commencement of new employment—OrdinanceNo. 2 of 1932, s. 11 (3) and (6).
Where a public officer retires on pension the commuted gratuity andthe pension paid to him during the year of assessment is not liable totax for that year of assessment as he does not “ commence a new employ-ment ” on retirement, within the meaning of section 11 (6) of theIncome Tax Ordinance.
HIS was a case stated by the Board of Review appointed under theIncome Tax Ordinance, No. 2 of 1932, which was referred by
Dalton S.P.J. and Maartensz J. to a Bench of three Judges.
The facts relating to the appeal are as follows : —The appellant retiredfrom the Civil Service on February 15, 1935. A notice of assessmentunder the Ordinance was served on him for the year 1934-1935. Theassessment was based on his salary and emoluments from April 1, 1934,up to February 15, 1935, and his pension of Rs. 1,602 from February 16,1935, to March 31, 1935, and his commuted gratuity of Rs. 43,750. Thecommuted gratuity was paid to him after the date of his retirement but
Peiris v. Commissioner of Income Tax.
within the year of assessment which ended on March 31, 1935. It wasstated in support of the assessment that the assessment was made onthe ground that under section 11 of the Ordinance the appellant ceasedhis employment as a Civil Servant on February 15, 1935, and commenceda new employment on February 16, 1935, and that the salary he receivedup to the date of his retirement as well as the pension and gratuitypayable after he ceased that employment were taxable.
The appellant, dissatisfied by the assessment, appealed to the Com-missioner of Income Tax, who referred the appeal to the Board of Review.The appellant contended before the Board that neither the commutedpension paid to him on retirement nor the pension paid to him for theperiod after his retirement on February 15, 1935, was taxable undersection 11 (6) (a) of the Ordinance. The Board of Review dismissed hisappeal.
H. V. Perera (with him G. E. Chitty), for appellant.—The question iswhether commuted pension is taxable. Tax is ordinarily assessed onincome for the previous year, section 11 (1). An exception is providedby section 11 (3). This case is governed by section 11 (6). Income onwhich tax is payable is only income up to the date of cessation of employ-ment. Any profits after such cessation are not caught up by this sub-section. Commuted pension is payable after cessation of employmentand was in fact paid afterwards. This may be caught up in the assessmentfor the following year. It is not correct to say that when a person ceasesto be employed, e.g., when he retires on pension he necessarily com-mences a new employment. The only argument for the Commissionersis that this is the practice in England. That is not an argument that canprevail in a Court of law.
M. W. H. de Silva, Acting S.-G. (with him Basnayake, C.C.), forrespondent.—Two questions have to be decided. Is this liable to tax,and is it liable to tax in the year of assessment. The Court is not boundby the way in which the case has been stated. It must find whether taxis payable on any basis at all, not necessarily under section 11 (6). Thisprovision is to meet a case where the source of income ends during theyear of assessment. The tax is assessed on the income for that year.Income from a source which has ceased to produce income is taxableunder section 11 (1). Pension is a new source of income. Section 11 (3)provides for that. New employment is governed by section 11 (4).Pension is a new employment in the English Statute (section 45).Assessee started to get an income which he had not previously received.Pension is profit from any employment (section 6 (2) ). Which employ-ment ? Not the employment as a Civil Servant. It must be profitsfrom an employment in existence. Pension presupposes an employmentwhich is a new employment.
[Dalton J.—Who is the employer of a pensioner ?]
The person who pays the pension. For the purposes of this sectionany pension is presumed to be from an employment. A fiction of anemployment has been created by the section.
H. V. Perera, in reply.
MACDONELL, C.J.—Peiris v. Commissioner of Income Tax.
March 6, 1936. Macdonell C.J.—
This was a case stated by the Board of Review appointed under theIncome Tax Ordinance, No. 2 of 1932, which was referred by Dalton andMaartensz JJ. to a Bench of three Judges. The case stated was asfollows: —
“ 1. At a meeting of the Board of Review, Income Tax, constitutedunder the Income Tax Ordinance, No. 2 of 1932, held on April 13, 1935,the appellant above named appealed against an assessment for incometax of his commuted gratuity of Rs. 43,750 and of the pension payableto him for the period from February 16, 1935, to March 31, 1935. Theamount of tax payable on the assessment is Rs. 4,573.88.
The facts relative to, and leading up, to this appeal are asfollows : —
The appellant retired from the Civil Service of Ceylon onFebruary 15, 1935. A notice of assessment under the Income TaxOrdinance for the year 1934—1935 was served on the appellant onMarch 9, 1935. The assessment was based on his salary and emolu-ments from April 1, 1934, up to February 15, 1935, and his pension ofRs. 1,602 from February 16, 1935, to March 31, 1935, and his commutedgratuity of Rs. 43,750. The commuted gratuity was admittedly paidto the appellant after the date of his retirement on February 15, 1935,but within the year of assessment which ended on March 31, 1935.
It was stated at the argument, in support of the assessment,that the assessment was made on the ground that, under section 11the appellant ceased his employment as a Civil Servant on February 15,1935, and commenced a new employment on February 16, 1935, andtherefore the salary he received up to the date of his retirement as wellas the pension and gratuity payable to him after he ceased thatemployment were all taxable. The decision of the Supreme Courtin the Commissioner of Income Tax v. Rodger1 was also relied on. Itwas on this basis that the Assessor assessed the appellant.
The appellant, being dissatisfied by the Assessor’s assessment,appealed against it to the Commissioner of Income Tax, who referredthe appeal direct to the Board of Review, under the provisions ofsection 72 of the Income Tax Ordinance. In doing so he placed beforethe Board the fact that it has always been the practice of the Depart-ment of Income Tax to treat an individual who retires on pension ashaving ceased his employment and commenced a new employment,and that the practice in the United Kingdom is similar.
The appellant contended at the hearing of his appeal that hedid not contest the taxation of his salary and emoluments up toFebruary 15, 1935, but that the appeal was only against the taxationof the commuted pension which he had in fact been paid after the dateof his retirement, and against the taxation of the pension paid tohim for the period after his retirement on February 15, 1935. Hecontended that neither of these was taxable as neither of them camewithin the wording of section 11 (6) (a) of the Ordinance, and that they
1 (1935) 35 N. L. R. 169.
MACDONELL C.J.—Peiris v. Commissioner of Income Tax.
did not come within section 11 (3) as he had not commenced any newemployment on February 16, 1935, so as to subject any income orprofits received by him between February 16, 1935, and March 31,1935, to income tax.
After hearing argument the Board decided on April 13, 1935,that the assessment should be confirmed and accordingly dismissedthe appeal.
Being dissatisfied with the decision of the Board the appellanthas requested the Board to state a case for the opinion of the Honourablethe Supreme Court on the question as to whether the commutedgratuity paid after February 15, 1935, but within the year of assess-ment and the pension payable for the period commencing February 16,1935, and ending March 31, 1935, are liable to income tax for the year1934-1935, which case we have accordingly stated and signed
This case necessitates an examination of section 11 of the OrdinanceNo. 2 of 1932, sub-section (1) of which is as follows :—“ Save as providedin this section, the statutory income of every person for each year ofassessment from each source of his profits and income in respect of whichtax is charged by this Ordinance shall be the full amount of the profits orincome which was derived by him or arose or accrued to his benefit fromsuch source during the year preceding the year of assessment, notwith-standing that he may have ceased to possess such source or that suchsource may have ceased to produce income ”. On this sub-section it isuseful to quote the remarks of Drieberg J. in Commissioner of Income Taxv. Rodger (supra) : “ We have two years to consider. The year of assess-ment * and the preceding year A person is not taxed on the incomeof the preceding year as such but on his income for the year of assessment,and by an arbitrary rule his income for the preceding year is accepted ashis income for the year of assessment: you do not tax the income of thepreceding year but you tax the income of the year of assessment andmeasure that income by that of the preceding year ”. This is the normalrule, but this same section 11 establishing that rule contains also theexceptions thereto. The exceptions contained in sub-sections (2), (5),(7), (8), (9), and (10) do not affect the present case stated, but it will benecessary to consider sub-sections (3), (4), and (6), and I will begin withsub-section (6).
This provides for the case of a person “ ceasing to carry on an employ-ment” and, omitting words immaterial to the present case, reads asfollows : —“ Where a person …. ceases to carry on … .employment in Ceylon …. his statutory income therefrom (i.e.,from the employment) shall be (a) as regards the year of assessment inwhich the cessation occurs (i.e., April 1, 1934, to March 31, 1935), theamount of the profits of the period beginning on April 1 in that year (i.e.,1934) and ending on the day of cessation (i.e., February 15, 1935), and (b) asregards the year of assessment preceding that in which the cessationoccurs (i.e., April 1, 1933, to March 31, 1934), the amount of the statutoryincome as computed with the foregoing sub-sections or the amount of theprofits of such year (i.e., 1933—1934), whichever is the greater ” and he
MACDONEL.L C.J.—Peiris v. Commissioner of Income Tax.
shall not be deemed to derive statutory income from such employmentfor the year of assessment (i.e., April 1, 1935, to March 31, 1936) followingthat in which the cessation occurs. “ Statutory income ” is defined in .section 2 of. the Ordinance as “ income from any source computed inaccordance with Chapter IV.” which chapter consists of section 11, thesection under consideration, and section 12 which does not concern thepresent case.
Now it seems clear that on February 15, 1935, the appellant “ ceasedto carry on an employment in Ceylon ”. He demitted his duties asPublic Trustee and received a pension. No one apparently could hence-forward lawfully require him to attend at the Public Trustee’s office orany other office and work there, and conversely he had no lofiger the rightto perform any of the duties pertaining to the office of Public Trustee orof any other office:He had ceased to carry on an employment within
the meaning of the sub-section, and this was, we understandj concededby both sides to this appeal.
If. then on February 15, 1935, the appellant had ceased to carry on anemployment in Ceylon, did he on that date “ commence to carry on…. an employment in Ceylon ” ? as is contended by the respondent
to this appeal. This is the case provided for by section 11, sub-sections(3) and (4).
Sub-section (3), omitting words immaterial to the present case, readsas follows:—“Where on a day” (i.e., February 15, 1935), “within theyear of assessment ” (i.e., April 1, 1934, to March 31, 1935) f “ any personcommences to carry on …. employment in Ceylon ….
any profit arising therefrom ” (i.e., from the employment) “ for the periodfrom such day ” (i.e., February 15, 1935) “ to the end of the year of assess-ment ” (i.e., to March 31, 1935) “ shall be statutory income of such personfor such year of assessment ” (i.e., for the year April 1, 1934, to March 31;1935). If then the appellant commenced an employment on February15, 1935, any profit arising from that employment, for instance hiscommuted gratuity and his pension for the next one and a half months,would be statutory income of his for the year of assessment April 1,
to March 31, 1935. And note that this constitutes an exceptionto the rule laid down in section 11 (1), that you tax the income of the yearof assessment but -measure it by that of the preceding year for, adheringto the facts of the present case, here as regards at any rate the commutedgratuity and the pension for the last one and a half months of the year,April 1, 1934, to March 31, 1935, you are measuring the income of theyear of assessment not by that of the preceding year but by the year ofassessment itself.
Section 11 (4) would seem to provide for the converse case, that,namely, of commencing an employment within the year preceding theyear of assessment, and this sub-section (4), again omitting immaterialwords, reads as follows:—“Where on a day” (here February 15, 1935),“ within the year ” (here the year April 1, 1934, to March 31, 1935),“ preceding the year of assessment ” (which would be the year April 1,
to March 31, 1936), “any person has commenced to carry oh,
…. employment in Ceylon …. his statutory income
therefrom for that year of assessment ” (in this case the year Fbruary 15,.
18MAC DON ELL C.J.—Peiris v. Commissioner of Income Tax.
F935, to February 14, 1936), “shall be the amount of the profits for oneyear from such day ”, in this case the year February 15, 1935, to February14, 1936.
You would surmise that this sub-section (4) was enacted to catch upcases where the person taxable had commenced to carry on employmentbut where the Income Tax Department had not become aware of thatfact until some time in the next year of assessment, and doubtless it wasinserted to provide for other cases also, but neither side to this appealcontended that the present case came under sub-section (4), but argued,the appellant that it did not fall within sub-section (3), the respondentthat it did. We must return then to sub-section (3) and try to answerthe question, did the appellant “ commence to carry on employment ”within the year of assessment, that is the year April 1, 1934, to March 31,1935, such commencement having occurred, if it did occur at all, onFebruary 15, 1935.
It was argued in the case cited, paragraph 5, that “ it has always beenthe practice of the Department of Income Tax to treat an individual whoretires on pension as having ceased his employment and commenced anew employment and the practice in the United Kingdom is similar ”.During the argument no English case was cited to us to show that this isthe practice in the United Kingdom and the cases cited in 35 N. L. R. 169hardly seem to bear out this contention. In Davies v. Braithwaitel,Rowlatt J. discusses fully the meaning of employment in the EnglishIncome Tax Act, 1918; and the Finance Act, 1922, trying to distinguish itfrom “ profession ” or “ vocation ”, and he points out that a person maywell have a profession and yet hold an employment, and he says atpage 635 : “ A musician who holds an office or employment under apermanent engagement can at the same time follow his professionprivately ”. It should also be mentioned that he was dealing withStatutes which on this subject are differently worded from our ownsection 11 and which seem to have tried to put “ profession ” or “ vocation ”into one category, and “ office ” or “ employment ” into another. Seealso section 45 (3) of the Finance Act, 1927, which distinguishes “ officeor employment ” from “ annuity, pension or stipend ”. In view of thisdifference between the English Acts and our own Ordinance, I doubtthat the former are of very much help, and the judgment I have quoteddoes not seem to contain anything in favour of the proposition that aperson going on pension thereby commences an employment. The othercase cited in 35 N. L. R. 169, is that of Seldon v. Croome-Johnson in 1932,"where the head-note says : “ Held that a junior Barrister on becoming aK.C. -does not set up a new profession but, it would seem, continues hisformer profession ”. This case was again decided by Rowlatt J., anddoes not deal with a person going on pension, as will be apparent from theportion of the head-note which I have just quoted. If then the practicein the United Kingdom is to treat an individual who retires on pensionas having ceased his employment, and having commenced a new employ-ment, one can only say that no authority was cited to us in support ofthat proposition, and even if it is the practice there, the difference betweentheir Statutes and our own Ordinance would tend to make English
decisions of doubtful authority with us.
1 (1931) 2 K. B. 628.
(1932) 1 K. B. 759.
MACDONELL C.J.—Peiris v. Commissioner of Income Tax.
This case then narrows down to a point of very small compass. Whatdid the appellant do by going on pension on February 15, 1935 ? Heceased to carry on an employment in Ceylon, section 11 (6) ; of that therecan be no doubt; and it seems to me equally clear on the plain meaning ofwords that he did not on that day commence to carry on employment inCeylon. If you say that he did, it is a necessary question, who was hisemployer, and what was his employment ? His employer, if he had one,was the Government of Ceylon paying him his pension; his employment,if he had one, was drawing the pension. It is surely a strain on languageto say that drawing a pension is an employment. At least I would askfor statutory or other authority before I agree that it was.
While writing this judgment I have had the advantage of seeing thatof my brother Dalton, and would respectfully concur in his interpretationof section 6 taken with the definition of “ profits ” or “ income ” insection 2. It is true that section 6 (2) enacts that “for the purposes ofthat section ” the term “ profits from any employment ” includes a“ pension ” and t hat section 6 (1) says that “ for the purposes of theOrdinance ” the term “ profits and income ” mean “ profits from anyemployment ”, consequently a “ pension ” will be a “ profit from anemployment ” and a “ profit and income ”, but the Ordinance does notanywhere say that a pension, even though a profit from an employment,commences an employment. Income derived from the investment of astock exchange speculation doubtless is “ from that speculation ” but itdoes not “ commence ” the speculation ; on the contrary it is a sine quanon of the income that the speculation should be a thing of the past beforethe income “ from ” it can arise. So here, surely on any ordinaryanalysis of the words used ; the pension is “ from ” the employment orbecause of the employment, but the very term, pension implies that theemployment is over or it would be called “ wages ” or “ salary ”■—section 6 (2) (a) (i)—nor is there anything in the Ordinance that I candiscover which says that a pension though a profit from an employment,yet “ commences ” an employment.
If the above considerations are correct, it seems to follow that theappellant, though he ceased to carry on employment in Ceylon on Febru-ary 15, 1935, section 11 (6), did not commence any employment or newemployment on that date, section 11 (3), and consequently the answerto the case stated must be that the commuted gratuity paid afterFebruary 15, 1935, but within the year of assessment, and the pensionpayable for the period commencing February 16, 1935, and endingMarch 31, 1935, are not liable to income tax for the year 1934 to 1935.
I do not know what effect this may have on the amount which theappellant will ultimately have to pay as income tax on his commutedgratuity and pension. After the conclusion of argument figures werehanded to us, with the consent of both sides, showing what tax theappellant would pay (a) on the basis that there was no cessation ofemployment, (b) on the basis that there was no cessation of one employ-ment and commencement of another, and (c) on the basis that there wasa cessation of employment without the commencement of a new one, butcounsel for appellant earnestly besought us not to go into such questionsas they would be outside the case stated to us, and any remarks thereon
DALTON S.P.J.—Peiris v. Commissioner of Income Tax.
merely obiter dicta. This is certainly correct and it will be sufficient todecide the case stated to us without speculating as to matters not strictlywithin that case.
For the reasons given above, I am of opinion that this appeal must beallowed with costs, and the question asked of us must be answered, as Ihave said above, in the negative.
It is conceded by the Commissioner that the standard basis for corn-putting the statutory income of every person for each year of assessmentis the full amount of the income derived from all sources during the yearpreceding the year of assessment. The year of assessment referred to inthe question raised in the case stated is the year April 1, 1934, to March 31,1935. The onus therefore is on the Commissioner to establish that thepayments made to the appellant for pension and commuted pensionbetween the dates February 15 and March 31, 1935, i.e., during thatyear of assessment, can be included for the purpose of ascertaining thestatutory income of the appellant for that year of assessment.
He purports to do this by seeking to show that the case falls within theprovisions of section 11 (3) of the Income Tax Ordinance. That sectionprovides that where on a day within the year of assessment any personcommences to carry on or exercise a trade, business, profession, vocationor employment, any profit arising therefrom for the period from such dayto the end of the year of assessment shall be statutory income of suchperson for such year of assessment. It is urged that on February 15,1935, the appellant commenced to carry on the employment of a pen-sioner and therefore any profit arising to him as pensioner from February15 to March 31, 1935, the end of the year of assessment, is statutoryincome of the appellant for that year of assessment.
In support of the argument that going on pension is the commencementof a new employment, the Commissioner relies on the provisions of section6 of the Ordinance. It is there enacted that the term “ profits from anyemployment ” includes a pension, or any sum received in commutationof pension. It is argued that because the law provides that a pension orcommuted pension is for the purpose of that section a profit from anemployment, therefore it necessarily follows that a person on pension iscarrying on the employment of a pensioner, and on the day on which hegoes on pension he commences the employment of a pensioner. I amquite unable to agree with any such argument.
The word “ from ” in the term “ profits from any employment ” canbe construed as “ by reason of ” or “ out of ”, and “ profits from anyemployment ” mean profits arising by reason of or out of any employ-ment. Reference to an English dictionary as to the meaning of theword “ pension ” shows that amongst other things it means “ a statedallowance to a person in consideration of past services”, or “a periodicalpayment made to a person retired from service on account of age,disability or the like ”, or “ a yearly sum granted by government toretired public officers …. who have served a number of years….” The payments of pension as a general rule, and taking the
ordinary meaning of the word “ pension ”, are made in respect of pastservices or past employment, and not because of any further service to
Saravanamuttu v. Chairman, Municipal Council, Colombo.
be done or performed after retirement to earn the payment of the pension.Section 2 of the Ordinance provides that for the purpose of that sectiona pension is to be deemed a profit from an employment, and is a statutoryrecognition of the meaning of the word “ pension ” which I have set outabove, for the purpose of this Ordinance, presumably because a pensionis in fact a payment for service or employment, although that employ-ment was in the past. This is recognized in section 16 of the Ordinancewhen the term “ earned income ” comes to be defined, although it is diffi-cult to understand on what principle a difference is drawn between personson the score of residence in regard to “ earned income ” in Ceylon. Thedefinition in section 2, however, in no way supports or justifies the fictionupon which the case for the Commissioner depends, namely, that a pen-sioner on retirement and going on pension commences a new employment.
For these reasons I am of opinion that section 11 (3) of the Ordinancehas no reference to this case inasmuch as the appellant did not commenceany new employment on February 15, by going on pension on that date.
The reference in the case stated to what is the English practice in thesematters is incorrect. There the matter is amply covered by the provisionsof the Finance Act, section 45. There the term “ employment ” whenreferring to present employment is clearly distinguished from such termsas “ pension ” or “ annuity ”.
I agree therefore, for the above reasons, that the answer to the questionsubmitted to this Court in the case stated must be that the commutedgratuity paid after February 15, 1935, but within the year of assessment,and the pension payable for the period commencing February 16, 1935, andending March 31, 1935, are not liable to income tax for the year 1934—1935.
The appellant is entitled to his costs of appeal.
Foyser J.—I agree.
PEIRIS v. COMMISSIONER OF INCOME TAX