001-NLR-NLR-V-67-THE-CELYON-TEA-PROPAGANDA-BOARD-Appellant-and-THE-COMISSIONER-OF-INLAND-REVENU.pdf
THE
NEW LAW REPORTSOF CEYLONVOLUME LXVll
Present: H. N. G. Fernando, J,, and T. S. Fernando, J.
THE CEYLON TEA PROPAGANDA BOARD, Appellant, andTHE COMMISSIONER OF INLAND REVENUE, Respondent
S. G. 111961—Income Tax Case Stated, BRA J291
Ceylon Tea Propaganda Board—Tea Propaganda cess—Inability to income teas—Exemption from profits tax—“ Government institution ”—“ Charitable purpose ”—“Includes”—“Profits ”—“Income ”—Tea Propaganda Ordinance {Cap.169), s.8—Income Tax Ordinance {as amended by Act Ho. 13 of 1959), as. 2,
5 {1), 6{l){a), 6{1) (g), 6 {1) {h), 7 (J) (a), 7 {1) {d), 8A—Trusts Ordinance,s.99—Profits Tax Act {Cap. 243), as. 2, 14.
The Tea Propaganda Board, an institution established by the Tea PropagandaOrdinance, was assessed to Income Tax in respect of the years 1950/51 and1954-1958, and to Profits Tax in respect of the years 1953—1956. The moneysin the hands "of the Board consisted principally of the proceeds of the specialexport duty on tea paid to the Board monthly by the Principal Collector ofCustoms in terms of section 8 of the Tea Propaganda Ordinance.
Held, (i) that the Tea Propaganda Board was not a “ Government institution ”as defined in section 2 of the Income Tax Ordinance. The fact that it receivedfinancial assistance from the Government in terms of section 8 of the Tea Pro-paganda Ordinance did not render it a Government undertaking. Accordingly,the Board was not entitled to claim exemption from income tax under section^(1) (a) of the Inoome Tax Ordinance.
that the Board could not claim exemption from income tax in terms ofsection 7 (1) (d) of the Income Tax Ordinance if only for the reason that it wasnot a body established for charitable purposes as contemplated in the exemptionclause. The activities carried on by the Board did not fall within any of thethree categories mentioned in the definition of “ charitable purpose ” in section2 of the Income Tax Ordinance. The definition of “charitable purpose ”inthat section was intended to be exhaustive and the word “ includes ” thereinwas not intended to have its ordinary meaning.
that the prooeeds of the export duty received by the Board under theprovisions of section 8 of the Tea Propaganda Ordinance were not “ profits ”as defined in paragraph (a) of section 6 (1) of the Income Tax Ordinance, forthey could not be regarded as an advantage or pecuniary gain from the
Lxvn—I
a *815—1.855 (3/M)
business carried on by the Board. Those receipts were, however, “ income ”within the meaning of paragraph (h) of section 6 (1) of the Inoome Tax Ordinanceand were, therefore, liable to income tax.
that the receipts in the nature of proceeds from the special export dutywere not liable to profits tax under the Profits Tax Act inasmuch as they werenot derived from any business within the meaning of section 2 of that Act.
Case stated under the Income Tax Ordinance.
W. Jayewardene, Q.C., with 8. Ambalavanar and S. S. Basnayake,for the asseesee-appellant.
M. Kanagasunderam, Crown Counsel, for the Respondent.
Cur. adv. volt.
June 17, 1963. H. N. G. Fernando, J.—
This is a case stated under the Income Tax Ordinance upon the questionwhether the Tea Propaganda Board which is an institution establishedby the Tea Propaganda Ordinance (Cap. 169) is liable to be assessed forIncome Tax in respect of certain moneys in the hands of the Board.A similar question also arises whether the Profits Tax Act (Cap. 243)applies to the Board.
The Board was assessed to Income Tax in respect of the years 1950/51and 1954-58, and to Profits Tax in respect of the years 1953-56, andunsuccessfully appealed to the Board of Review against these assessments.
By Act No. 13 of 1959, Section 8 (A), the Income Tax Ordinance wasamended by the insertion thereof of express provisions exempting theincome of the Board from tax, but subject to an argument as to the impliedeffect of this amendment, the express exemption does not include within thescope of the exemption liability to tax in respect of the years for whichthe assessments under consideration were made. The Tea PropagandaBoard consists of several members representing various business andcommercial interests but in addition three Government officers areex officio members of the Board. The principal purposes for which theBoard is established is to advertise Ceylon teas and to create, promote,encourage and further the demand for Ceylon teas in the markets of theworld. Section 8 of the Ordinance provides that in order to providean income for the Board a special export duty is to be levied on the ex-port of tea from Ceylon, the proceeds of which duty are to be paid overmonthly to the Board by the Principal Collector of Customs. I shallnow refer to each of the grounds upon which counsel for the Board arguedthat the Board is not liable to be assessed to tax.
S
Counsel did not seriously press the argument that the Board is a" Government Institution ” as defined in Section 2 of the Income TaxOrdinance and therefore exempt from taxation in terms of section 7 (1)(a). It will be seen that the definition specifically mentions certainGovernment Departments and generally includes “ any other Depart-ment or undertaking of the Government of Ceylon”. The functions ofthe Tea Propaganda Board are not carried out by Government officersand although some officials are members of the Board, they receive noremuneration on that account from the Government. The fact that in asense the Government may be regarded as making a contribution towardsthe expenses of the Board by appropriating to it the proceeds of thespecial export duty does not render the Board’s undertaking a Govern-ment undertaking. There are many undertakings, non-governmentalin nature, which receive financial assistance from the Government.
The principal argument stressed before us was in the form of a claimthat the income of the Board is exempt by virtue of section 7 (1) (d), theBoard being claimed to be an institution or trust of a public characterestablished solely for charitable purposes. I do not find it necessary todecide whether or not the Board is an institution of a public charactersince in any event it is not in my opinion a body established for charitablepurposes as contemplated in the exemption clause. By the definitionin section 2 of the Ordinance, “Charitable purpose” includes relief of thepoor, education and medical relief, and it cannot be said that the activitiescarried on by the Board fall within any of the three categories mentionedin the definition. Nevertheless it was argued that it was the intentionof the Legislature that all purposes held to be charitable in the wellknown definition expounded by Lord Macnaghten in Income Tax^Special Purposes Commissioners v. Pemsel1 should in relation to theapplication of the Income Tax Ordinance be also regarded as chari-table. Reliance was placed in this connection on the ordinary effectgiven to the word “ includes ” in statutory definitions, namely, thatthe enumeration following that word in a definition is not exhaustive.While agreeing that the word “ includes ” must ordinarily be given thateffect, it is clear to me that in the definition of “ charitable purpose ”in the Income Tax Ordinance the word ** includes ” was not intended tohave its ordinary meaning.
The categorisation of charitable purposes into the four divisions statedin the Pemsel case was not unfamiliar to the Legislature of Ceylon for wefind in section 99 of the Trusts Ordinance that these same four categories
1 (1891) A. O. 531.
are included in the definition of a charitable trust with alterations appa-rently considered necessary for the Ceylon law. It is most likely that thesame definition of charitable trust was examined at the time of theenactment of the Income Tax Ordinance, and if there had been anyintention that the expression “ charitable purpose ” should have the samewide meaning as in the Trusts Ordinance, it is strange that the olddefinition was neither incorporated in the Income Tax law nor adopted byreference. An examination of the original text of the Ordinance also servesto show that the omission from the definition of certain purposes, whichdo fall within the definition in the trust law, was deliberate. For instance,paragraphs (d) and (e) of the original section 7 mentioned separatelyboth charitable purposes and religious purposes, or in other words, anexemption was provided in regard to certain religious purposes indepen-dently of their being charitable. It seems clear that since this separateexemption was expressly made in regard to religious purposes, suchpurposes (which in the trust law are included within the scope of “ chari-table purposes ”) were deliberately omitted from the list of purposesspecified in the Income Tax Ordinance definition as being charitable.For these reasons I have little hesitation in agreeing with the view ex-pressed by Weerasooriya, J., that the definition of “ charitable purposes ”in the Income Tax Ordinance was intended to be exhaustive.(63 N. L. R. 409).
A further point argued was that the moneys in the hands of the Boardwhich consist principally of the proceeds of the special export duty arenot “ profits ” or “ income ” as defined in section 6(1) of the Income TaxOrdinance.
Having regard to the language and form of section 6, the propercontention would appear to be that those proceeds are not within themeaning of the section profits f rom any trade or business. Sub-section(1) contains a comprehensive definition of the terms“ profits and income”,“ profits ”, and “ income ”, giving to each of them the same meaningAccordingly, each suoh term, when used in any provision of the Ordinanceother than the definition itself, bears that comprehensive meaning, eventhough that meaning may be wider than or different from the ordinarymeaning of the term. But in my opinion, the word “ profits ”, when itoccurs in paragraph (a) of the definition section 6 (1), bears only itsordinary meaning, namely “advantage, benefit, pecuniary gain, or excess ofreturns over outlay ” (Concise Oxford Dictionary), and the question there,for is wether the proceeds of the duty can be regarded as an advantage
or pecuniary gain from the business carried on by the Board. No doubtthe Board does carry on a business, namely that of tea propaganda, andmay incidentally carry on some other business or some trade, and theproceeds of the duty are received and utilised for the purpose of carryingon the business. But these proceeds are not properly profits from thebusiness, because they are not earned or produced in the course of or as aresult of the business which is carried on. They are in fact received fromanother source, in the same sense as would be the case if the trusteesof a will are directed to make periodical payments to the Board or if theGovernment had vested land in the Board in order that it may receivean income in the form of rents. If for instance a trading company holdsland from which rent is derived and uses that rent for its trading purposes,the Ordinance does nor regard that rent as profits from the trade; theliability of that rent to tax arises not through paragraph (a) of section 6 (1),but instead through paragraph (g) ; so also dividends or interest or annui-ties received by such a company are liable through paragraphs (e) and(/)• With respect, it seems to me that these considerations escapednotice in the Law Society case1, where it was held that the annual grantreceived by the Society constitutes “profits from a trade or business-(paragraph (a)), and also an annuity (paragraph (/)), and also incomefrom any other source (paragraph (h)). I agree that the grantwas taxable either under paragraph (/) or else under paragraph (ft), butit was strictly speaking illogical to hold that a receipt is both a profitfrom a business and also income from another source. For myself, Ido not agree that the grant is a profit from a business.
The case of Rolls v. Miller2, which is cited in the Ceylon Law Societyjudgment, decided that the maintenance of a lodging house, at whichboard and lodging was provided free of charge for working girls, consti-tuted a “ business ”. But the meaning of the term “profits ” did notarise in the case ; the only question was whether the undertaking wasa “ business ” carried on in breach of a covenant not to use the premisesfor any business. That decision does not help me to answer the quitedifferent question whether the income, if any, which the organisers pro-bably received in the form of voluntary contributions, fell to be regardedas “profits derived from the business”. Such income would in myopinion be liable to income tax in Ceylon through paragraph (ft) of sub-section (1) of section 6 ; it would not be “ profits ” under paragraph (a),because it is not derived from or through the business. It is noticeable
1 (1954) 56 N. L. JR. 97* (1884) 27 Ch. D. 71.
2*B, 4815(05/3)«in this connection that in the clauses of the Ceylon Ordinance which allowexemptions for religious and charitable institutions, the exemption isallowed for “ income ” and not for “ profits ” (section 7 (1) (c), (<Z) (/)).
Crown Counsel relied upon two other English decisions, one concerningthe Mersey Docks and Harbour Board1 and the other concerning the Portof London Authority2 in which it was held that the two concerns didderive profits from business. The receipts in each case consisted mainlyof port, harbour and dock fees paid by users of the harbour or port forservices provided, and the profits represented the difference betweenthe amount of the receipts and the expenses incurred in providing theservices. The principal question in dispute was whether these weretaxable “ profits ” having regard to a duty imposed by statute in each caseto apply the moneys to specified public purposes, and what was held wasthat this statutory provision did not colour the fact that profits were■ earned. In each case there was little room for doubt that profits werederived from the business, in the form of payments received for the provi-sion of services rendered in the business of port operators. There wasno question, as there is in the case of the Tea Propaganda Board, ofreceipts which consist mainly of moneys made available to the Boardin the form of a grant of the proceeds of an export duty.
This consideration, that a receipt by a business undertaking is not tobe regarded as a profit from the business unless earned, derived or pro-duced by or in the course of business operations, does not have the conse-quence that the proceeds of the export duty received by the Tea Propa-ganda Board are not liable to income tax. Clearly, these receipts are“ income ” contemplated in paragraph (h), where the word has its ordin-ary and wide connotation of periodical revenue receipts from any sourcewhatsoever. But that construction has a different consequence uponthe liability to the profits tax. Section 2 of the Profits Tax Act(Cap. 243) provides that the Act applies to “ every person who derivesany profit or income from any business ” and proceeds to assign rather awide meaning to the term “ business ”. Thus paragraph (6) of Section2 includes within the definition the holding of immovable property orinvestments in a case where the functions of a registered company-consist wholly or mainly in the holding of such property or investments.But this very paragraph serves to show that except in the stated instancerents, dividends or interest derived by a trading company are not to beregarded as profits or income from its business as a trader. Thus alsoit seems that royalties which are mentioned in paragraph (g) of section6 (1) of the Income Tax Ordinance, are not regarded for the purposesof Profits Tax as profits or income from a business.
Here again the question of difficulty is not whether the Tea PropagandaBoard carries on a business, for it undoubtedly does so ; but the questionis whether the proceeds of the export duty are “profits or income”which the Board derives from that business.
1 2 T. C. p. 25.
*12 T. C. p. 122.
It might be thought at first sight that the words “ profits or income ”occurring in section 2 of the Profits Tax Act include all the receipts enume-rated in the several paragraphs of section 6 (1) of the Income Tax Ordin-ance. But this first impression is not borne out by section 14 of theProfits Tax Act, which while adopting a number of sections of the IncomeTax Ordinance does not adopt section 6. Upon the strict constructionwhich must be given to a taxing statute, there is at least a doubt whetherthe Legislature intended that receipts in the nature of proceeds from thespecial export duty should be taxable under the Profits Tax Act.
The case stated by the Board of Review does not contain a statementof questions for determination by this Court, but it is convenient toanswer some of the questions stated by the Assessee in the Applicationfor a Case Stated.
“ 1 : Whether the Ceylon Tea Propaganda Board is liable to IncomeTax under the provisions of section 5 (1) of the Income TaxOrdinance or of any other provision of the Ordinance.” :YES.
“ 2 : Whether the Board is exempt from tax under section 7 (1) ofthe Ordinance.” : NO.
“3: Whether the Tea Propaganda cess is “income” within themeaning of the Income Tax Ordinance liable to assessment toIncome Tax.” : YES, within the meaning of Sec. 6 (1) (h).
“4: Whether the Tea Propaganda cess represents profits of any “ busi-ness ” or “ trade ” or other “ transaction ” as to be liable toany Income Tax under any provision whatsoever of theOrdinance.” : NO.
“ 9 : Whether the Board is an Institution or Trust of a public charac-ter established solely for charitable purposes and thereforeexempt from tax under section 7 (1) (c) of the Income TaxOrdinance.” : NO.
In regard to the liability to profits tax, the proper formulation of thequestion which arises, and the answer thereto, should be :—
“ Is the Tea Propaganda Board liable to pay profits tax upon theproceeds of the Tea Propaganda cess, as being profits or income whichthe Board derives from a business.” NO. The Board does carry ona business, but the proceeds of the special export duty are not (withinthe meaning of section 2 of the Profits Tax Act) derived from anybusiness.
As the Assessee has been partly successful, I would make no order forcosts.
T. S. Fernando, J.—I agree.
Appeal partly allowed.