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Short title.
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1. This Act may be cited as the Profits Tax Act.
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Application of Act.
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2. This Act applies to every person who derives any profits or income from any business, the term ” business” for this purpose being deemed to include –
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(a) any trade or gainful undertaking of any nature or description whatsoever ;
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(b) in the case of a registered company of which the functions consist wholly or mainly in the holding of immovable property or investments, the holding of such property or investments ; and
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(c) the practice or pursuit or conduct of any profession, vocation, art, craft or skilled occupation of any description, with a view to earning remuneration, fee or pecuniary reward,
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irrespective of any break in the continuity of his business or the length of time devoted by him thereto.
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The profits or income derived by any person from any such business as aforesaid is hereinafter referred to as his ” taxable profits or income ” for the purposes of this Act.
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Imposition of profits tax.
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3. A tax, to be known as the ” profits tax “, shall, subject to the provisions of this Act and notwithstanding anything contained in any other written law or in any convention, grant, or agreement, be charged and levied and be paid or be recovered, at the rate or rates specified hereinafter for the year commencing on the 1st day of January, 1947, and for each subsequent year, in respect of the taxable profits or income of every person to whom this Act applies.
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Each of the years for which the profits tax is leviable as aforesaid is hereinafter referred to as a ” profits tax year “.
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Exemptions from profits tax.
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4. Notwithstanding anything in section 3 –
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(a) any profits from employment; or
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(b) any profits which are exempt from income tax under the provisions of the Income Tax Ordinance,
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shall be exempt from profits tax under this Act and shall accordingly be left out of account in the computation of the taxable profits or income of any person who earns or receives any such profits or income.
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Determination of profits or income.
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5. In the determination of the profits or income of any business for the purposes of this Act, the provisions of the Income Tax Ordinance, which relate to the ascertainment of profits or income for the purposes of that Ordinance, shall apply subject to the following limitations and modifications : –
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(a) No deduction shall be allowed in respect of losses incurred in any period other than the accounting period.
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(b) Sums payable by way of interest for the accounting period on money borrowed for the purposes of the business, or by way of any annuity, ground rent or royalty payable in respect of the business shall be allowed as deductions in computing the profits :
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Provided that no deduction shall be allowed in respect of interest on a loan secured by hypothecation of assets not forming part of the assets used for the purposes of the business.
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(c) Deductions for wear and tear, renewals and bad debts, and for expenses, shall be only of such amount as appears to the Commissioner to be reasonably and properly attributable to the accounting period.
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(d) Any deduction allowable for the remuneration of directors, managers and persons concerned in the management of the business shall be only of such an amount as in the opinion of the Commissioner is reasonable and is properly attributable to the actual services rendered in the accounting period.
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(e) A payment of gratuity or pension in respect of past services shall be allowable if the Commissioner considers the amount thereof reasonable.
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(f) Where it appears to the Commissioner that any transaction is artificial or fictitious, or that any disposition is not in fact given effect to, or that any transaction or disposition has been entered into either wholly or partly with a view to the avoidance of the profits tax, he may disregard such transaction or disposition for the purposes of the determination of the liability to profits tax and the assessment and recovery thereof. For the purpose of this paragraph, ” disposition ” includes any trust, grant, covenant, agreement, or arrangement.
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(g) No account shall be taken of any interest, dividends or rents received from investments or from immovable property except in the case of a building society, banking business, insurance business or business consisting wholly or mainly in the holding of investments or immovable property : Provided that in the case of public holding companies whose income is derived from dividends, any such dividends which have been received from companies which have already paid profits tax on those dividends shall not be subject to profits tax under this Act.
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(h) No deduction shall be allowed in respect of amounts paid or payable in Ceylon as profits tax or income tax, or in respect of any amounts paid or payable in any other territory by way of any tax which, in the opinion of the Commissioner, is a tax of a like nature to that imposed under the Income Tax Ordinance or this Act:
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Provided that in the case of income arising outside Ceylon any tax of a like nature as the tax imposed under this Act shall, if it is paid in any other territory, be allowed as a deduction.
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Profits assessable for the several profits tax years.
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6.
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(1) The taxable profits or income for the profits tax year commencing on the 1st day of January, 1947, shall-
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(a) in the case of each business which has been liable to excess profits duty under the Excess Profits Duty Ordinance, No. 38 of 1941, be the profits or income from such business for the period commencing on the day next succeeding the date on which that Ordinance ceased to apply to the profits of that business and ending on that day in the year 1947 up to which the accounts of that business are usually made up and which has been or is adopted as such for the purposes of ascertaining statutory income from that business for either of the years of assessment commencing on the 1st day of April, 1947, and the 1st day of April, 1948, as the case may be, under section 13 (1) or section 13 (2) of the Income Tax Ordinance ;
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(b) in the case of each business not referred to in paragraph (a), be the profits or income for any period of twelve months ending after the 1st day of January, 1947, which has been or is adopted as the year preceding the year of assessment under section 13 (1) or section 13 (2) of the Income Tax Ordinance.
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(2) In the case of each business commencing on or after the 1st day of January, 1947, the taxable profits or income for the profits tax year in which the business commences shall be the profits or income for the period from the date of commencement of such business to the date up to which the accounts of that business are made up and which will be adopted as such for the purpose of ascertaining the statutory income from that business under section 13 (1) or section 13 (2) of the Income Tax Ordinance.
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(3) The taxable profits or income for each subsequent profits tax year in respect of each business shall be the profits or income for a period of twelve months immediately following the period the profits or income of which have been charged or are chargeable for the preceding profits tax year.
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(4) In the case of a business ceasing on or after the 1st day of January, 1947, the taxable profits or income for the profits tax year in which that business ceases shall be the profits or income for the period commencing on the day next succeeding the date up to which the accounts of that business for the last preceding year, if any, were made up and which has been adopted as such for the purpose of ascertaining statutory income under section 13 (1) or section 13 (2) of the Income Tax Ordinance, and ending on the date of cessation of such business :
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Provided that where any such cessation of business occurred at any time during the profits tax year commencing on the 1st day of January, 1947, by reason of the death of the person by whom, or the liquidation of the company by which, the business was carried on, the taxable profits or income from that business for that profits tax year shall be computed only in respect of the period commencing on the 1st day of January, 1947, and ending on the date of the cessation of the business.
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Aggregation of profits and set-off of losses.
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7.
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(1) Where any person carries on or is engaged in more than one business, the taxable profits or income of that person for any profits tax year shall be ascertained by aggregating the profits determined under section 6 in respect of such businesses for that year, or where any loss has been found under section 6 to have been incurred in any such business in respect of that year, by setting off such loss against the aggregate of the profits of the other businesses for that year.
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(2) In the case of a person who is a member of a partnership, his share of the divisible profits of the partnership for any profits tax year shall be aggregated with the taxable profits or income derived by him from any other business for that year; and his share of the divisible loss of the partnership for any profits tax year shall be set off against the taxable profits or income derived by him from any other business for that year.
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Set-off for loss in preceding years.
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8. The taxable profits or income of any person for any profits tax year shall be reduced by the amount of any loss or aggregate loss, which, in the event of its being a profit, would have been assessable to profits tax in the two preceding profits tax years, if, but only if, such loss or aggregate loss has not been set off against the taxable profits or income of any previous profits tax year.
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Determination of chargeable surplus of profits or Income.
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9. The chargeable surplus of profits or income of any person for each profits tax year shall be ascertained by deducting from the taxable profits or income of that person for that year as determined under the foregoing sections an allowance equal to the larger of the two following amounts ; –
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(a) an amount equal to six per centum of the capital employed in the business or each business of that person at the commencement of the accounting period of which the profits are assessed to tax in that year; or
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(b) an amount of fifty thousand rupees :
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Provided that –
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(i) in the case of a Hindu undivided family having two working members, the amount shall be seventy-five thousand rupees, and
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(ii) in the case of a Hindu undivided family having three or more working members, the amount shall be one hundred thousand rupees ;
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Provided further that if the profits or income from any business, included in the taxable profits or income of any person for any profits tax year, is for a period other than one year, the amount of the allowance to be deducted under the preceding provisions of this section shall be varied or adjusted by the Commissioner, who shall, in so doing, have due regard both to the amount of the taxable profits or income from that business and to the length of time during which such profits or income arose.
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10. The rate of the profits tax payable in respect of each profits tax year shall be twenty per centum of the chargeable surplus of profits or income of each person to whom this Act applies :
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Provided, however, that the rate of such tax payable in respect of the profits tax year commencing on the 1st day of January, 1951, and of each subsequent profits tax year shall be twenty-five per centum of such chargeable surplus.
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Computation of capital.
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11. In the computation of the capital used for the purposes of any business, the following provisions shall apply: —
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(a) Subject to the provisions of paragraph (b) of this section, the amount of the capital shall, so far as it does not consist of money and –
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(i) so far as it consists of assets being debts due to the person carrying on the business, be taken to be the nominal amount of those debts, subject to any reduction which has been allowed in respect of those debts for income tax purposes ;
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(ii) so far as it consists of assets acquired by purchase, be taken to be the price at which those assets were acquired, subject to any proper deductions for depreciation or for unpaid purchase money ;
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(iii) so far as it consists of assets acquired by gift or under the last will or on the intestacy of a deceased person, be taken to be the value of the assets at the date of the gift in the case of a gift, or at the date of death in the case of a devise or inheritance, subject in each case to any proper deduction for depreciation since such date.
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(b) In any case where the Commissioner is of the opinion that, for the computation of the capital used for the purposes of the business of an agricultural undertaking, the value of any land and the buildings, machinery and other fixtures thereon cannot be determined in accordance with the provisions of paragraph (a) of this section, the value of any mature area of that land, inclusive of all buildings, machinery and other fixtures in that area, shall, for that computation, be taken to be an amount calculated –
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(i) where that area is planted with tea, at the rate of eight hundred rupees per acre, or
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(ii) where that area is planted with rubber or coconut, at the rate of six hundred rupees per acre, or
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(iii) where that area is planted with cacao or coffee, at the rate of five hundred rupees per acre, and the value of any area of that land which is not a mature area and which is planted or interplanted with tea, or rubber, or coconut, or cacao, or coffee shall, for that computation, be taken to be an amount which the Commissioner, having regard to the rate per acre herein before specified in relation to a mature area, considers reasonable in the circumstances of the case.
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(c) Any capital which is proved to the satisfaction of the Commissioner to have been introduced into the business after its acquisition, or any profits so proved to have been employed to effect permanent additions to or improvements of the assets of the business, shall be treated as capital employed in the business, subject to any necessary deduction for depreciation and for assets disposed of or lost.
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(d) Any money borrowed or debts incurred in connexion with the business or charged upon the assets thereof shall be deducted in computing capital, and in particular –
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(i) any duty chargeable under the Excess Profits Duty Ordinance, No. 38 of 1941, and unpaid at the beginning of the accounting period shall be deducted ;
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(ii) capital shall be deemed to be reduced by the amount of the profits tax, on the first day after the accounting period in res pect of which it is payable.
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(e) Where a part of a business is carried on in Ceylon and a part outside Ceylon and the liability to profits tax arises only in respect of that part of the business in Ceylon, the capital employed in that part which is liable to profits tax shall be computed separately from the capital of the whole business :
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Provided that where for any reason it is found that the capital of a company cannot be conveniently ascertained, application may be made to the Commissioner that the capital be ascertained by taking such proportion of the issued capital of the company and of the reserves as are in the opinion of the Commissioner represented by assets of that part of the business ;
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Provided further that the Commissioner may in his discretion direct that the capital of that part of the business which is in Ceylon shall be taken to be the amount which bears to the capital of the entire business the same proportion as the gross receipts of that part of the business bear to the gross receipts of the entire business.
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Each share of partnership business to be deemed a separate business.
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12. The share of any person in the assets and business of any partnership shall, for the purposes of this Act, be deemed to be a business carried on by him :
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Provided that where the Commissioner is satisfied that any partnership is fictitious or that any person has been admitted as a new partner to any partnership with a view to the avoidance or reduction of any liability to tax under this Act, the Commissioner may, notwithstanding anything in any deed or agreement relating to such partnership or the admission of the new partner, and notwithstanding the registration of the names of the partners or of the new partner under the Business Names Ordinance, disregard the existence of such partnership or the admission of the new partner, as the case may be.
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Deduction of profits tax for purposes of income tax.
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13. The amount of the profits tax paid by any person on the taxable profits or income from any business for any accounting period shall be allowed as a deduction in computing the profits or income of that business for that period for purposes of income tax ; and where profits tax has been so paid in respect of more than one business, then the amount of profits tax to be so allowed as a deduction in respect of each business shall be determined by the Commissioner, who shall, in so doing, have due regard both to the amount of the taxable profits or income from that business and to the length of time during which such profits or income arose.
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For the purpose of allowing any such deduction, any assessment made under the Income Tax Ordinance may, notwithstanding the provisions of section 79 of that Ordinance, be amended accordingly, and any tax found to have been paid in excess as a result of such amended assessment shall be refunded, notwithstanding that the claim for such refund may be made after the expiry of the period of three years prescribed in section 89 of that Ordinance.
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Application of certain provisions of the Income Tax Ordinance.
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14. The profits tax imposed by this Act shall be charged, levied and recovered in like manner as the income tax, and for that purpose the following provisions of the Income Tax Ordinance, namely –
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sections 2, 3, 4, 5, 14, 30, 33, 40, 41, 42, 56 (8), 56 (9) and 57, and
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Chapters IX, X, XI, XII, XIII, XV and XVI,
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shall apply mutatis mutandis and subject to such limitations and modifications as are imposed or made by this Act.
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15.
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(1) In this Act, unless the context otherwise requires –
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” accounting period “, in relation to any business, means the period in respect of which the taxable profits or income from that business are determined under section 6 ;
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” chargeable surplus ” means the surplus of profits or income ascertained in accordance with the provisions of section 9 ;
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” mature area ” means an area which is fully planted with tea, or rubber, or coconut, or cacao, or coffee and the plantation in which is in full bearing ;
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” taxable profits or income” has the meaning assigned to it in section 2.
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(2) For the purposes of this Act, a person shall not be deemed to be a working member of a Hindu undivided family unless he –
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(a) has attained majority ; and
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(b)
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(i) devotes his full time to the business of such family, or
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(ii) if he is engaged in any other business or employment, devotes more than half of his working time to the conduct of the business of such family.
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