SHANMUGANAYAGAM AND ANOTHER v. THE COMMISSIONER – GENERAL OF INLAND REV

039-SLLR-SLLR-1991-V-1-SHANMUGANAYAGAM-AND-ANOTHER-v.-THE-COMMISSIONER-GENERAL-OF-INLAND-REV.pdf


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SHANMUGANAYAGAM AND ANOTHERV.THE COMMISSIONER – GENERAL OF INLAND REVENUESUPREME COURTFERNANDO J.
AMERASINGHE J. ANDDHEERARATNE J.
S.C. APPEAL NO. 1/88CA/LA/SC NO. 28/87CA NO. 1/7902 JULY 1991.
Income Tax • Test applicable to new undertaking for exemption of income tax -Inland Revenue Act, No. 4 of 1963, section 6 – Commencement of new venture.
Mrs. Edmund Rodrigo ran a same printing work-place for rural girls – her object beingto assist the girls to advance themselves. She supplied them with imported doth andthe girts printed and sold the sarees. Mrs. Rodrigo levied a small charge from theprofits of each same. On 20.9.1966 the business was registered as Flower Textiles.
CA Shanmuganayagam and another v. The Commissioner – General of
Inland Revenue391
On 28.2.1968 the business was converted into a partnership under a new proprietoryarrangement A Mrs. Shanmuganayagam and others joined the venture. Earlier thebusiness had been conducted at the residence of Mrs. Rodrigo and later at theresidence of Mrs. Shanmuganayagam. Mrs. Rodrigo ceased to be a partner on31.8.1968. In the meantime the business had developed. The partnership purchasedraw material and sold the manufactured goods. In September 1968 the business wasmoved to a newly constructed building at Edmonton Road.
Mrs. Shanmuganayagam (one of tie partners) claimed exemption from liability to paytaxes on her share of the profits and income from Rower Textiles for the years 1970/71 and 1971/72. The Commissioner of Inland Revenue disallowed Mrs.Shanmuganayagam's claim. In appeal the Board of Review held with theCommissioner. As Mrs. Shanmuganayagam was not in agreement, six questionsturning on the date of commencement of commercial production were referred to theCourt of Appeal. The Court of Appeal held that commercial production commencedin 1964/65. An appeal was referred to the Supreme Court.
Held:
Section 6 of the Inland Revenue Act No. 4 of 1963 grants income tax exemptionto an industrial undertaking commenced after 01 April 1951 provided theCommissioner of Inland Revenue is satisfied inter alia, that “the undertaking isnot formed by the splitting up or reconstruction of any business previously inexistence."
Whether an undertaking is a new venture or an old one would depend on avariety of factors, The transfer of assets from the old business to the so callednew venture would be one indication of continuation alter reconstruction asopposed to the creation of an altogether new venture. Here the quotas ofraw materials and foreign exchange allocated to Mrs. Rodrigo constituted themost important asset of the venture and continued even after she retired.
As it was in the beginning, the business always continued to be the printing ofsarees. A business may be conducted in a somewhat altered or varied form and,indeed, there may even be a complete reconstruction of the old venture but itmay nevertheless continue to be the old business, instead of farming out workhere the partnership employed a permanent staff. Significantly the accounts ofthe continuing partnership were made up for 12 month periods from the date ofretirement of Mrs. Rodrigo's, viz. 31 "August.
Section 6 does not reckon tha date of commencement of the 5 years period (forexemption) from the date of commercial production. In any event the businesswas of a commercial nature. Profit may have been at first incidental. Graduallypartial altruism was replaced by tha total motive of pecuniary gain. The businesswas commercial from its beginning.
Cases referred to
Commissioner of Income Tax V. Gaekwar Foam Rubber Co. Ltd., 35 1 TR 662,669, 670.
Textile Machinery Corporation V. Commission of Income Tax 107 TR 195, 203,204.
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APPEAL from answers supplied by Court of Appeal to question referred by the IncomeTax Board of Review.
K. Nadarajah with Miss. M.P.C. Joseph and R.G.L. de Silva for appellantsK. Sri Pavan S.S.C. for respondent • respondent.
Cur. adv. vult.
12 July 1991AMERASINGHE, J.
One Mrs. Edmund Rodrigo had, at her residence at No. 4, FlowerTerrace, taught girls from rural areas the art of printing sarees. Shesupplied them with cloth imported on the basis of quotas and importlicences granted to her for this purpose by the Ministry of Industries.The printed sarees were sold by the girts. The principal object of thisventure was to assist the girls to advance themselves in life. However,Mrs. Rodrigo levied a charge varying from Rs. 1 – 1.50 on the profitsfrom each saree sold. In the year of assessment 1965/1966 she had,according to the tax return (R6) made by her husband, received asum of Rs. 7000 from this levy of Rs. 1 – 1.50. In the following yearof assessment he acknowledged in the tax return (R7) the receipt ofRs. 7000 from the levy. In the next year Mr. Rodrigo in the tax return(R8) acknowledged the receipt of Rs. 3695 from the levy. On 20September 1966 the venture was registered under the BusinessNames Ordinance (Cap. 149) as a business under the name of"Flower Textiles". In his tax return for 1968/1969 (R9) Mr. Rodrigostated that the business of Flower Textiles was closed down in April1967.
However, on 28 February 1968 the business which was, as it werein a state of suspended animation was re-vivified under a newproprietary arrangement. The business was converted into apartnership, with four others, including one Mrs. C. Shanmuganayagam,one of the two Appellants in this case, (the other being her husband)joining Mrs. Rodrigo in her saree-printing venture. The particulars inthe Certificate of Registration under the Business Names Ordinancewere duly amended to reflect the change.
The business of Rower Textiles under the partnership was notconducted at the residence of Mrs. Rodrigo but at the residence ofMrs. Shanmuganayagam at No. 103, Hulftsdrop Street. The businessat Hulftsdrop Street was carried on by contracting with other textile
CA Shanmuganayagam and another v. The Commissioner – General of
Inland Revenue (Amerasinghe, J.)393
printers to do the work of printing. The partnership purchased rawmaterial and sold the manufactured goods. Mrs. Rodrigo ceased tobe a partner on 31st August 1968. Between the date of the revivalof the business in the form of a partnership (28 February 1968) andthe date of retirement of Mrs. Rodrigo (31 August 1968) from thepartnership business, the partnership had a turnover of Rs. 43,403.
A new building was constructed at Edmonton Road at a cost ofRs. 14,000 in which new equipment purchased for Rs. 2449was installed. The business expanded rapidly after it moved inSeptember 1968 to its new home at Edmonton Road. WhenMrs. Shanmuganayagam, one of the partners, was called upon to paytaxes, she claimed that she was not liable to pay taxes on her shareof the profits and income from Flower Textiles for the years 1970/
and 1971/1972. Her contention was that, in terms of Section 6(2)(ii) of the Inland Revenue Act No. 4 of 1963, the income and profitsfrom Rower Textiles was entitled to exception from tax for a five yearperiod as a new industrial undertaking which had commenced businessin September 1968.
The Commissioner of Inland Revenue disaflcwed Mrs. Shanmuganayagam'sappeal. He was of the view that Flower Textiles was not within the fiveyear period during the years of assessment 1970/71 and 1971/72. Shethen appealed to the Board of Review which held that, although theprofits of the business known as Rower Textiles were exempted fromtax from the year of assessment 1965/66 to the year of assessment1969/1970, the profits for the years of assessment 1970/71 and 1971/
did not fall within the 5 year period of exemption referred to inSection 6 of the Inland Revenue Act
Since Mrs. Shanmuganayagam was not in agreement with the decisionof the Board of Review, the Board of Review in terms of section 102of the Inland Revenue Act No. 4 of 1963 submitted the case to theCourt of Appeal for its opinion on the following questions:
(a) Whether on the evidence led in the case the Board of Reviewerred in law in coming to the conclusion that the commercialproduction of the business of Rower Textiles commenced in theyear 1964/65 as there was no industrial undertaking of FlowerTextiles prior to the year of assessment 1967/68,
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Whether the Board of Review erred in law in determining that theprofits of the business of Flower Textiles were exempted from taxfrom the year of assessment 1965/66 to 1969/70, which questionwas not in fact referred to the Board of Review for decision, asthere was no such business of Flower Textiles in existence priorto the year of assessment 1967/68;
Whether on the evidence in the case the Board of Review erredin law in holding that the commercial production of the businessof Flower Textiles commenced earlier than September 1968;
Whether on the evidence led in the case the Board of Reviewhas erred in law in holding that the industrial undertaking of FlowerTextiles consisting of textile printing and processing was formedin 1968 in terms of Section 6(1) (ii) of the Inland Revenue ActNo. 4 of 1963 by the splitting up or reconstruction of a salescommission business carried on by Mrs. E. Rodrigo since 1964without any equipment as expressly declared in her Income TaxReturns;
Whether the Board of Review erred in law in stating that theprofits of the business of Flower Textiles for the years ofassessment 1970/71, 1971/72 are liable to tax.
Whether the Board of Review could have reached the conclusionthat the business under consideration commenced in 1964/65.
After several days of hearing, the Court of Appeal reserved Order andon 27.11.1987 answered the questions (a) – (e) in the negative andquestion (f) in the affirmative.
This is an appeal from that Judgment of the Court of Appeal. Theessence of Mr. Nadarajah's submission on behalf of the Assessees-Appellants is that the business conducted at Edmonton Road fromSeptember 1968 was a new industrial undertaking producing approvedgoods or commodities and it was therefore entitled to exemption fromtax under Section 6 of the Inland. Revenue Act for the years ofAssessment 1970 * 1971 and 1971 -1972, which years fell within thefive year tax exemption period.
Mr. Nadarajah submitted that a provision such as Section 6 of theInland Revenue Act No. 4 of 1963 ought to be liberally construed sothat effect might be given to the intention of Government to encourane
CA Shanmuganayagam and another v. The Commissioner – General of
Inland Revenue (Amerasinghe, J.)
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industrialization by the setting up of new enterprises. He conceded,however, that there was no ambiguity in the section. In thecircumstances, in my view, there is no need for construction. I mustgive effect to the plain meaning of the words of the section.
/
Section 6 of the Inland Revenue Act No. 4 of 1963 grants incometax exemption to an industrial undertaking commenced after 1 April1951 provided the Commissioner of Inland Revenue is satisfied, interalia, that "the undertaking is not formed by the splitting up orreconstruction of any business previously in existence . . *
Mr. Nadarajah says that the Edmonton Road operation was a newventure and not formed by a splitting or reconstruction of theHulftsdorp or Rower Road venture. Whether an undertaking is a newventure or an old one in that sense would depend on a variety offactors. The transfer of assets from the old business to the so callednew venture would be one indication of continuation afterreconstruction as opposed to the creation of an altogether newventure. In this case, the quota of raw materials and foreign exchangeallocated to Mrs. Rodrigo constituted the most important asset of theventure and continued during the period when Mrs. Rodrigo was apartner and after she retired from the partnership of Rower Textiles.
Mr. Nadarajah cited the decisions in Commissioner of Income Tax v.Gaekwar Foam Rubber Co. Ltd. (1) and Textile Machinery Corporationv. Commission of Income Tax (2). These decisions make it clear that,where, as in this case, an undertaking carries on its former activitieswithout loss or abandonment of its original activities or identity, it wouldnot be new, distinct and separate from the old business. As it was inthe beginning, the business always continued to be the printing ofsarees.
A business may be conducted in a somewhat altered or varied formand, indeed, there may even be a complete reconstruction of the oldventure, but it may nevertheless continue to be the old business.
The Edmonton Road operation was located at a new address. It wasset up in a new building which was constructed at a cost of Rs.14,000. Equipment worth Rs. 2449 was installed in these premisesand instead of ‘farming out“ work, the partnership employed apermanent staff of 25 workers and 15 casual employees. Its turnover
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increased to Rs. 412210/77 during a twelve month period. Significantly,the accounts of the continuing partnership were made up for twelvemonth periods from the date of retirement of Mrs. Rodrigo, viz. 31August Admittedly the venture had flourished and the place and modeof doing business were altered to meet the growing needs of toeventure and to further improve its efficiency and productivity. But itwas toe business Mrs. Rodrigo started at Flower Road.
It was alleged that the 'commercial production" of business of RowerTextiles commenced after September 1968, that is after it moved toEdmonton Road. Section 6 does not reckon the date ofcommencement of the five year period from the date of commercialproduction. In any event the business was of a commercial nature.Profit may have been at first incidental. Gradually, partial altruism wasreplaced by the total motive of pecuniary gain. But the business wascommercial from the days of its beginnings on the verandah of Mrs.Rodrigo's residence, for in exchange tor the supply of raw materialsand guidance on printing and advice on marketing, she received acommission from the sale of each saree. The dominant motive in toeearly days may have been regard for the welfare of the rural girls.But it was not the only purpose.
I affirm the Order of toe Court of Appeal with regard to toe answersgiven by it in response to the case stated by toe Board of Reviewand dismiss toe appeal without costs. However, it is not necessaryfor me to consider toe observations of toe Court of Appeal with regardto the question of the appropriate circumstances tor judicial interventionin relation to the decisions of the Commissioner and I refrain fromdeciding that matter.
FERNANDO, J. -1 agree.
DHEERARATNE, J. I agree.
Appeal dismissed.